Home ownership is the quintessential American dream. Apart from freeing yourself from the burden of renting, living in a house you can call your own evokes a sense of fulfillment. However, you ought to pull the trigger only when you’re financially ready.
Before shopping around for houses in Kansas City, Houston, or Denver, look for these signs to determine whether you can afford to buy a property:
You Don’t Have to Touch Your Emergency Fund
Purchasing a house would create a hole in your savings, but it shouldn’t render you penniless. Although you’re required to put down a certain amount, it shouldn’t exhaust your resources. You should still have cash reserves enough to support your needs for at least three next months in case you become jobless. If paying your down payment would erase too many zeros in your bank account’s balance, you should probably continue saving.
You Have the Means to Pay More than the Minimum Down Payment
While you’re not expected to pay 20% of the property’s purchase price up front, you should nevertheless pay as much as you could. The larger your down payment, the faster you can build equity in your property. Struggling to meet just your lender’s minimum loan-to-value ratio requirement can be an indication that you’re not ready to take out a mortgage.
You Can Absorb Your Monthly Mortgage Payment
Analyze your current debt-to-income ratio. Generally, 43% is the highest number lenders consider. Anything more than that increases the level of risk the other party has to take to provide you with a home loan. In other words, all of your monthly debt payments shouldn’t consume over 43% of your monthly income to consider yourself financially ready for a mortgage.
You Intend to Stay Put for at Least Five Years
In most cases, buying a house isn’t worth it if you have plans to move within 60 months. Considering the real estate market’s inherent uncertainty and volatility, you might save more money if you rent your place of residence during that period.
Owning a house is exciting, but you have to understand the financial side of it. Think with foresight, and do the math to determine whether this is the right direction you should take.