Buying your first home is a significant milestone and not a decision that anyone should take lightly. It’s a major financial commitment that requires going through a specific process before signing on the dotted line. And then there is the matter of homeownership. If you’re wondering whether or not you are financially ready to own a home, here are some questions that can help you decide.
What Do You Need to Become a Homeowner?
It might be tempting to start attending open houses or looking at homes for sale in your area, but it would be wise to do some financial soul searching first. Most people can’t afford to pay cash for a home, so you’ll need to show a mortgage lender that you are financially stable.
You need a reliable and stable source of income that can also be documented for a lender. If you can produce several years’ worth of tax returns, pay stubs, and/or W-2’s, you’ll be in good shape.
In evaluating your financial health, an important metric is your debt-to-income ratio (DTI), which indicates how much of your monthly income is going towards paying off existing debt. To qualify for a mortgage, your DTI should be as low as possible but ideally at 50% or less.
Is Your Credit Good Enough to Qualify for a Mortgage?
Your credit score also plays a role in your ability to qualify for a mortgage and get one with affordable terms. Your personal credit score is based on several factors:
- The amount you owe
- Your payment history
- The type of credit you use
- The length of your credit history
- Any recent applications for new credit
Most lenders want to see a minimum credit score of 580, but you will get more options and better terms as your credit score increases above 620 and then again goes over 720.
How Much Home Can You Afford?
If you can pass those first financial tests, it’s time to figure out how much home you can afford. You can go back to that DTI calculation and determine how much of your monthly income can be reasonably allocated towards homeownership.
Instead of simply focusing on the mortgage payment, don’t forget to take into account all of the costs of owning a home. When you figure out home much home you can afford, be sure to include your mortgage payment, insurance, property taxes, and maintenance/upkeep costs.
Can You Afford a Down Payment and Closing Costs?
Once you have a figure in mind for your home purchase price, it’s time to consider your options to get the deal done. Not every homeowner will be able to get a loan for 100% of the purchase price, so you will probably need to come up with a down payment.
On a conventional mortgage, the down payment is 20% of the purchase price, but you can get much lower minimum down payments with government-backed loans. For example, FHA loans have a 3.5% minimum down payment.
It’s important to note that being willing to put more money down on a home will often give you more mortgage options. Further, a larger downpayment means you are financing less and will have lower monthly mortgage payments. Finally, you may be required to pay private mortgage insurance (PMI) on a loan with a small or no downpayment.
Provided you can afford the down payment, you will also need to set money aside for closing costs. These costs include things like title insurance and appraisal fees, and will vary depending on your type of loan.
If you’d like to explore your options for homeownership in the Lexington, SC area, The Lafayette Team and EXP Realty can help. As knowledgeable and experienced residential real estate professionals, we specialize in helping first time and move-up homebuyers achieve their goals through an exceptional level of service and accessibility. Contact us today to learn more about our services in our featured areas of Lexington, Elgin, Blythewood, Columbia, Lake Murray, and Chapin.