Know how much you’ll spend each month on utilities, and even things like trash removal? How about homeowner’s insurance?
These expenses will be on top of the amount you pay for your mortgage each month, so make sure you factor them into your budget.
Be sure to look for homeowner’s association fees as well. While not all neighborhoods have them, some do, and they could be costly. Realtor.com says that homeowner’s association fees typically run about $200 to $300 per month.
If you’re considering taking cash out of your emergency fund to make your down payment, you’re probably not yet ready to buy.
On an episode of NPR’s podcast “The Indicator,” certified financial planner Jill Schlesinger discusses why it’s a bad idea.
“When you decide you think you want to buy, you may be surprised to find out that it costs a lot of money to get into the place where you want to be. That may require you to put down all of your liquid assets into this house down payment and leave you what we like to call ‘house poor,'” she says.
She stresses that keeping an emergency fund can help avoid making rash money decisions in the future, and help ease stress in the event of job loss, injury, or other life events.
A good indicator of home-buying readiness is whether or not you can make the full 20% down payment.
Putting down the full 20% can help you avoid having to pay for private mortgage insurance, an insurance policy generally added to the monthly mortgage payment (if you put down less than 20%) that protects a lender if a borrower stops paying on the loan.
Private mortgage insurance will cost somewhere between 0.3% and 1.2% of the balance on your loan, according to insurance broker Policygenius. For example, private mortgage insurance on a loan balance of $250,000 could add up to $3,000 extra to your total cost. But this isn’t necessary if you have the full 20% upfront.
Is the total amount of those bills, fees, and your mortgage payment still under 30% of your monthly pre-tax income? If so, you’re probably in good shape to buy.
Keeping your housing expenses under 30% will allow you to contribute 10% to your 401(k) and save for retirement.
While many Americans spend about 37% of their income on housing, it might limit your lifestyle down the road.
Your down payment certainly won’t be the only money you’ll be spending on your new home. And if you’ll still have plenty left for hidden costs, buying furniture, and other costs that come up during closing, you’re probably in good shape to buy.
Having some extra cash for these expenses can help you save on potential financing costs in the long run. Putting new furniture or appliances on a credit card can be rather costly, but having the cash on hand can help you avoid that extra expense.
While there’s no rule that you must pay off every cent of student loan debt before taking on a mortgage, you should consider the impacts of having two large debts.
On her podcast “Jill on Money,” Jill Schlesinger suggests to a caller with over $100,000 of student loan debt that she make a dent in those loans before she considers homeownership.
“You are not buying a house right now,” Schlesinger tells the caller. “It will feel like you are drowning.”
And this goes for any other significant debts — make sure that your debts are under control before trying to take on another.
If your debt-to-income ratio is high, it might be harder to get approved for a mortgage. In fact, 43% is generally the highest ratio that can be approved for a mortgage. You can check this by adding up all of your monthly debt payments and dividing that by your monthly income.
Generally, 36% or lower is considered ideal for homeowners. So, if your ratio is much higher than you expected, there are two ways to go: either increase your income or pay off some of your debt.
While it’s possible that those with higher debt-to-income ratios can be approved, you might be looking at higher interest rates or lower approval odds, as lenders might consider you a higher-risk borrower.
Article by Liz Knueven