Are You Financially Ready for Homeownership?
It Isn’t a Race – Take Your Time
The decision to buy your first home is a major, life-changing event and should never be taken lightly or made quickly. Not only is it the most significant financial purchase you will likely ever make, but it’s also a commitment to your lifestyle and personal sense of well-being.
Certainly, a home is a valuable asset, but it is much more than a number we see on a financial spreadsheet. It’s our haven. It’s where we plan to raise our children. It’s where we will dream about our future. It’s where we will celebrate our victories and cope with the setbacks of life. There is the whole story of homeownership.
Yes, buying real estate is a big deal, and I won’t lie to you, it can be a stressful and intimidating process, especially for a first-time buyer. However, it isn’t written in stone that it will be this way for everyone. It can and should be an exciting and joy-filled process. Being financially ready is critical in making it work in your favor.
Let’s look at five positive signs that say you may be in the financial position to become a homeowner.
1. Your Finances Are Solid
One of the critical factors to ensure a positive homeownership experience is stable finances. A reliable source of income that can cover your mortgage, property taxes and homeowners insurance should not be more than 30% of your gross monthly income.
Also, consider that debt will be a consideration when you apply for a mortgage. If you carry a high amount of credit card debt and other consumer loans you might want to pay that down before you attempt to buy a home.
If you are currently living paycheck to paycheck and not putting anything towards savings, you are probably not ready to buy as yet. Work out a plan to cut back on expenses or increase your income. Setting up a budget might be beneficial to help you achieve your financial goals.
2. You Have a Down Payment
Although it is most desirable to have 20% of the price of the home you plan to purchase as a down payment, most first-time buyers do not have that much saved. It’s not a deal breaker. Depending on the type of mortgage, down payments can range from 3% to 20%.
Additionally, there are first-time home-buyer non-profit and agency programs available that can assist you with funding depending on your financial circumstances. Some mortgage options also allow a buyer to receive a portion or all of the down payment funds as a gift. Talk to several lenders and research your options ahead of time.
3. You Have Money for Closing Costs
In addition to a down payment, you will need money to cover closing costs. These also depend on the particular financing vehicle you will be using and the lender. Not to worry you will be given an estimate of this upfront so you can plan.
Generally, closing costs average between 2 to 5 percent of the purchase price. So, if the cost of the home is $200,000, you might pay between $4,000 and $10,000 in closing costs. There is a possibility that you could roll all or part of these costs into the mortgage if the sellers are willing.
4. You Have Money for a Home Inspection, Moving Expenses, and an Emergency Fund
The one thing you should never cut corners on to save money is a home inspection. That could turn out to be the biggest mistake you make in the entire process. A professional home inspection cost is determined by the age and size of the home you are buying. The average in Minneapolis is $385. If you want more information on the Home Inspection process, The American Society of Home Inspectors is an excellent resource.
If you have friends with muscles and trucks, you might have moving covered for a nominal cost. Otherwise, you will have to consider a truck rental or professional mover. Prices vary depending on the time of year and day of the week, and of course, how much furniture and “stuff” you are moving.
Don’t overlook any repairs, updates or renovations you plan to make to the home. Maybe you want to buy new furnishings or need new appliances. Although décor changes can wait, it is strongly suggested you have an emergency fund set aside. It would be a mistake to spend all your savings. When you own a home, the unexpected often happens. A pipe breaks, the washer needs repairs, or you may be subject to a tax assessment. You need a buffer for emergencies and peace of mind.
5. You Have A Good Credit Score
A decent Fico Score cannot be shrugged off as unimportant. A low score will limit your options and may even disqualify you for a loan. The better your score, the better the terms you will be offered for a mortgage up to and including your interest rate.
Now is an excellent time to pull your three yearly free credit reports from Transunion, Experian, and Equifax. Check them thoroughly for mistakes. If you have any negative items impacting your score, now is the time to fix them if you can or start on the road to repairing your credit. You can do this by paying your bills on time and paying off your debt. One of my favorite sites for credit information and analysis is Credit.com.
If you have all five of the necessary financial elements covered, it may be time to get a mortgage pre-approval and begin the exciting adventure of buying a home!
As always, thanks for reading. You know where to find me.
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