How to Make Sure You Are Financially Sound Enough to Buy a House

Buying a house is one of those big life events that
requires
extensive planning and preparation. It is also generally the most expensive purchase the average person will ever make. When you contact a real estate agent in preparation to find a home, one of the first things they will ask you is if you are pre-approved and ready to buy a home. In the wake of the mortgage handout years, being financially sound is not just an option but a requirement in most cases. How do you know if you are financially sound enough to buy a home? The following criteria will help you decide if you are ready to take the home-buying plunge.

Learn To Budget

Having a good budget is integral to the home-buying process. Knowing exactly how much money you have coming in and where it goes every month is necessary to know how much of a house payment you can afford. If you have not started a strict budget yet, you will want to do so before considering homeownership. 

The next step is to workshop your potential home into this budget. It is important to remember that there are many extra costs associated with owning a home that

are
not present in a rental situation. You can expect to pay more for utilities, and you may have to pay for utilities that you did not previously pay for in a rental, such as waste disposal. Other potential expenses include homeowners association dues, property taxes, insurance, landscape maintenance, and eventual small repairs.

Down Payments

The next step is to consider your down payment. Gone are the days of zero-down loans. In most cases, the traditional 20 percent down is now often a requirement. For a $250,000 mortgage, this means $50,000 could be required to secure the loan. There are options to avoid this, such as piggyback loans, but those come with higher interest rates and folding the down payment into the loan means higher mortgage insurance. 

However, the down payment is not the only expense involved in a mortgage, you will also need money for closing costs and moving expenses.

Savings Plus Income

Look next at your income and savings. It probably goes without saying that you should have a reliable job and steady income flow, but in the case of a couple, it is increasingly important that a mortgage is based on only one income. You may be able to afford a mortgage while you are both working, but if one party loses their job or goes back to school, it is important that the one income is enough. Most financial experts also suggest that you have at least three to six months of savings in case of an emergency.

Deal With Debt

Debt is another potential problem area. Going into home ownership with a mountain of debt is never a good idea. These days lenders are far more wary of loaning money and typically will want to see that your potential housing costs will not consume more than 33 percent of your gross income. Furthermore, they will expect to see that your total debt, including housing costs, does not consume more than 38 percent of your income. 

This means that if you have any other large debts, you may want to consider paying them off before pursuing homeownership. In the same vein, you will also want to take the opportunity to make sure that your credit is in good shape. Although there are loans out there for bad credit, they often come with higher interest rates.

There is no doubt that buying a home is a big responsibility requiring both commitment and financial stability. However, if you are financially sound and ready to be your own landlord, owning a home can be very rewarding and a good investment for the future.

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