Buying a Home – Is Now the Time for You to Buy?
If you are considering buying a home there are a lot of things to think about. The first of which is oftentimes simply determining whether or not now is the right time to buy. If you’re giving thought to buying your first home or upgrading to a new one here are some helpful things to keep in mind.
Should I buy or rent?
The first question that many people face when considering whether to buy a home is whether or not to buy in the first place. The buy versus rent decision involves a lot of moving pieces and is oftentimes more art than science. If you plan to only live in a city for a couple years it is unlikely the right time to buy, however, if you’re ready to settle down and make your city your home for the long-term then buying is probably a better bet. It’s also important to factor in the impact buying a home will have on your taxes. The IRS allows you to write off the interest you pay on your mortgage which can help lower your taxable income, ultimately putting more money in your pocket.
Can You Get Approved?
Getting preapproved for a home loan can be harder than you think. If you haven’t worked at one place for at least two years, it may be hard to qualify for a mortgage; however, if you have switched jobs but stayed in the same field you may still be able to qualify. Your potential lender will also pull your credit score and your interest rate will be weighted heavily based on your score. If you have any bills that will show up on your credit rating, and you can afford to pay them off before trying to get preapproved, do so, it can save you thousands in interest later.
When you sit down with your potential lender, make sure to have all of your financial documents with you, and be ready to answer several questions about your personal finances. Also be sure to explain your income very clearly – salary and hourly are treated very different, so are bonuses and commission.
Can You Afford the Monthly Payment?
Once you have been preapproved, you will be able to do some calculations to see how much you truly can afford. Just because you were approved for a $400,000 loan does not mean you should buy that much home. Look at your budget and set a dollar amount for how much you can pay every month, and use that to figure out how large of a loan you want to take on. A simple rule of thumb is to avoid any monthly payment that exceeds over 28% of your gross income. “The rule of 28” is not ironclad but it can be a useful starting point for determining what you can afford.
Do You Have Cash for a Down Payment and Closing Costs?
Once you have been preapproved and have decided on the loan amount you feel comfortable with, you then need to estimate your down payment and closing costs. With most loans, you will need to have anywhere from 3%-20% of the home’s price as a down payment – it all depends on your credit score. In addition to that, you will also need cash for your closing costs, which vary based on your location, but is typically $2,000+. If you put less than 20% down on your home you’ll end up paying mortgage insurance which can be costly.
If you have found a good job, plan to stay with your current company for several years, enjoy the area you’re looking to reside in, and are ready to plant your roots, then it just might be the right time to buy.
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