Let’s say you’re self-employed. You just hit your second year of operating in the black, and you’re tired of running your dog-walking business out of the corner of your apartment. You want a real home office, with a yard for your dog. Or you’ve been working at the same company for several years; you’ve got a steady income and are tired of living in an apartment. You are ready to do what it takes to buy a home.
But getting a mortgage takes time, a precious commodity, regardless of whether you’re your own boss or working for someone else. Before you pull together all the necessary documentation and checking interest rates, do a little homework to see if you’re truly, financially ready to start the process.
Check Your Percentages
Put yourself in the role of a lender and look at your financial situation dispassionately. Grab a calculator and figure out some key percentages, based on your current spending pattern as a renter. Mortgage lenders assess debt loads. According to Investopedia.com, a household should spend no more than 28 percent of its gross monthly income on total housing expenses, and no more than 36 percent on all recurring debt.
So, what does that mean for you?
Let’s say you have an annual gross income of $85,000. Applying the 28/36 rule, the calculations would look like this:
28% of $85,000 = $24,000
$24,000 divided by 12 = $2,000 per month for total housing expenses
36% of $85,000 - $30,600
$30,600 divided by 12 = $2,550 per month for recurring debt expenses
Compare that to your actual spending. If your numbers fit within those percentage parameters, you’ll look good to a potential lender.
Look at Your Savings
One of the biggest single checks you may ever write is for the down payment on a home. A factor that will help you qualify for a favorable interest rate is if you can put twenty percent down.
Before you start calculating how much you’ll need for such a down payment, also think about the expenses you’ll have after moving into your new home. You want to be able to afford the down payment plus have money left over to make the home “yours” and maintain it. Picture your dog frolicking in that big, green yard. Now imagine the irrigation system you have to put in to keep the grass green, and the mower you have to buy to keep it looking neat. There’s a dollar value tied to all those things!
So, if you’ve got $35,000 in the bank, you might consider buying a $200,000 home. That would be a comfortable amount to cover the down payment, closing costs, and other related fees, with some left over for paint, some new furnishings — and that lawn mower.
Ongoing Costs of Ownership
The next round of calculations involves a little outside research. Take a look at the area in which you’d like to live. A quick online search can show you the average property taxes for that area based on a home’s value. Then do another search for the average utility costs. Finally, give your renter’s insurance company a call to find out what homeowner’s insurance would cost you. These three numbers will give you a good snapshot of the monthly costs you’ll need to factor into your budget beyond a mortgage payment.
Add It All Up
You’ve got a lot of numbers in front of you now. Pat yourself on the back! It took some work to pull it all together. Armed with this information, you’ve got solid insight. You will know whether you’re truly ready to comfortably buy a home, or if it’s time for some goal-setting to determine when you will be.