Financial analysis is an important step to determine homeownership capability. You get to know whether or not you can afford a home, and if yes, then how much you can afford. Budgeting, on the other hand, can help you save and make homeownership affordable for you.
The mortgage underwriter, too, takes a closer look at your present financial situation before coming to a conclusion. The underwriter wants to know if the borrower is capable of making payments for the entire term of the loan, analyzing carefully the financial strengths and weaknesses of a borrower.
Affordability analysis
You can begin with affordability analysis, which can help you determine if you are able to afford the purchase of a home. Several factors are considered for the calculation of your homeownership affordability. These may include your income, liabilities, and the funds available with you. Besides, your results may vary depending on the type of home loan you choose, the likely taxes and insurance for the home, and the estimated closing costs. Make it sure that your debt-to-income ratio is within acceptable limits.
What is a debt-to-income ratio?
What-if analysis
A variation of affordability analysis is what-if analysis, which allows you to use different parameters for different results. You can use your income, expenses, available funds, down payment and other parameters as variables to find the combination that best suits you. You can create a what-if scenario to choose the best loan option as well as to determine the maximum amount you can comfortably borrow and the best interest rate you should be looking for.
Here is an example of what-if analysis
Cost benefit analysis
Home buying may not be a sensible decision even if you can afford to buy one. This is because the costs of owning a home may be far greater than the benefits you get as a homeowner. A cost benefit analysis is, thus, necessary, especially when you want to buy a second home (a property that is not owner-occupied and may be used for renting).
You can compare the costs and benefits of homeownership with the cost benefit analysis, which uses absolute values of the factors.
The benefits may include
- Tax rebates for the mortgage interest and property taxes you pay
- The appreciation in the value of your home over time
- The opportunity to cash in on the home equity you build with property appreciation
The costs may include
- The interest you pay on the loan
- Closing costs
- Relocation and moving expenses
- Property taxes
- Homeowner’s insurance premiums
- Private mortgage insurance premiums
- Maintenance costs (including those associated with normal wear and tear or weathering on the property)
Renters must also do a buy vs. rent analysis
Budgeting
Budgeting is the allocation of a sum of money to meet a particular purpose. You need to make a budget to follow through the steps of homeownership successfully. Keep a record of all income earned and spent during a specific period of time, usually a month. See if you are left with enough funds to meet your mortgage obligations every month.
Building your credit can be an important step of budgeting
Updated on: March 28th, 2015 by Marlon Brown