Homeownership is a dream and a mortgage loan is the key to realize this dream. Before you can begin searching for a house and a suitable lender, you need to ask a few questions to determine if buying is indeed a good idea. Pause a while and ponder over these questions before you can move forward to prequalify and apply for a mortgage loan.
Are you OK with Renting?
Do you intend to stay at a place for a long time? Is your job permanent and income stable? Is the house rent in your area comparable to the monthly payment of the mortgage you would qualify for?
The answers to the above questions will help you determine if the time has come to say goodbye to renting. Buying a new home is not always a good idea, especially when your payment is much bigger than the average rent or you plan to move within 5 years.
It is also a risky affair if you are not keeping with a permanent job or a stable income.
Can you Afford Homeownership?
The next big question is whether you can really afford to pay every month a good sum continuously for a period of 15 to 30 years. Loss of job, severe illness, permanent injury and similar mishaps can seriously limit your capability to continue with payments, which can eventually bring you at the doorstep of foreclosure and loss of property.
Most experts are of the opinion that your payment should not increase more than one third of your monthly income. While it is 31% in case of FHA-insured loans, conventional mortgages require it to be much lower at 28%. You also need to know how much you can afford and how big your house should be depending on your budget.
Are you going to stay in your new home for at least 5 years?
A home buying process is a costly affair. Apart from the regular monthly payments, you need to spend for closing costs and fees for the various professionals involved at the various stages of the process. If you want to sell your home too soon, you may end up losing money as you need to pay for the selling cost.
Besides, you also won’t gain much from the equity of your home as most of your payments consist of interests in the initial few years of mortgage amortization. A general rule of thumb is that you stay for at least 5 years in your new home before selling it and moving to another one.
If you do not intend to stay for more than 5 years but still want to buy a house, you can choose an adjustable-rate mortgage option. Depending on the loan type, you might be offered with fixed payments for initial few years (3 or 5 years) at low interest rates.
Do you have Enough Savings?
It is very difficult to buy a home without spending a dime from your pocket. Most lenders require you to pay upfront a portion of the cost of real estate purchase. Depending on your mortgage type, it can vary from 3.5% to 20%.
Ideally, you should be prepared to pay down 20% of the cost of the house you are going to buy. In case of FHA-backed loans, you need to pay as little at 3.5% while buyers with VA loans need not make any down payment.
Besides down payment, you need to pay closing costs and a number of other expenses. Also, you would need money to buy new furniture and pay for moving expenses. All these make it necessary for you to have enough savings.
Moreover, you may also want to have some extra money in your savings account to avoid delinquency and late payment in case of a fund crisis. It is ideal to have three to five months’ extra payments in your savings account.
Is your credit score good enough for a low interest rate?
To maximize the benefits of homeownership, you need to shop for the best interest rate and loan terms. Your credit score can play a pivotal role in determining the rate of interest you may be eligible for. Generally, you need to have more than 700 in order to pre-qualify quickly at rates around 5 percent.
Anything above 750 will help you obtain the best rates in the market. A credit score of 720 is also considered good while the minimum standard for qualification at most lenders is set at 640-660. If you can quality for FHA loans, you might be eligible with even 500-580.