Becoming a homeowner is one of the biggest financial investments you can make in your lifetime. Whether you’re buying a home for the first time, or you’re already a seasoned homeowner, the decision shouldn’t be made lightly.
You could be considering an upgrade for several reasons. Maybe you’re welcoming a new addition to the family, or perhaps there’s a new career opportunity on the horizon that requires you to move. Or maybe you just want a bigger yard, or to be closer to your friends and family.
Whatever the reasons you’re thinking about purchasing a home, there are a lot of factors to consider before making your decision. We’ll take you through some of the key things to look at when deciding to become a homeowner.
Affordability
The biggest piece of the puzzle, as with many big financial decisions, is budgeting for the cost. However, unlike with other big purchases such as cars or vacations, figuring out how to finance a home can get complicated — fast.
There are many variables involved with the cost of purchasing a home, including the location of the home and how expensive the area is, your income and financial history, and much more.
Debt-to-Income Ratio
Most experts agree you can probably afford the cost of a home if you can qualify for a mortgage on a new home. However, that’s harder than you might think.
First of all, lenders use the Federal Housing Administration’s 43 per cent debt-to-income ratio standard to approve mortgages. The ratio helps determine if borrowers can make mortgage payments every month. That means that prospective homeowners’ regular monthly debt payments combined with their housing costs can’t exceed 43 per cent of their monthly gross income.
Lenders also consider the front-end debt-to-income ratio when approving mortgages for homeowners. This is a homeowner’s income versus the monthly debts they might incur from expenses such as mortgage payments and mortgage insurance. The standard for this ratio is usually preferred to be no higher than 28 per cent.
To calculate how much a typical homeowner would have to spend on housing costs to qualify for a mortgage, here’s an example: if the homeowner’s monthly income is $4,000 per month, you can multiply that by 0.28 to get $1,120.
In order to be approved for a mortgage without any debt, a prospective homeowner applying for a mortgage would need to keep their monthly costs below $1,120, or get a higher paying job.
Down-Payment
The next thing to consider is the down-payment, which of course will factor into your monthly mortgage payments.
Maybe you’ve saved up a nice little nest-egg for this very occasion. Or, maybe you were the favorite child of some great-great-grand-relative who left you a modest sum. Regardless, you need to consider exactly how much you can afford to invest into a down-payment, and how much you will have leftover to make monthly payments.
Your down-payment will be directly reflected by the cost of the house you’re buying. Technically, you can make a down-payment as little as 3.5 per cent, however some lenders will not offer a mortgage unless homeowners make at least a 5 to ten per cent down payment.
For example, if the cost of the home you were purchasing was $300K and you put down a 5 per cent down-payment for a 30-year mortgage, the down-payment would be $15,000, and your monthly mortgage payments would be around $1,500 with an interest rate of about 3 per cent.
Most real estate experts recommend saving for a 20 per cent down-payment on a home, because this way homeowners avoid Private Mortgage Insurance. Private Mortgage Insurance can add anywhere from $30-$70 for every $100K borrowed to a homeowner’s monthly mortgage payments.
Your Market
Markets vary immensely in affordability even from one neighborhood to another, so it’s important to keep this in mind when you’re shopping around for a new home.
A four-bedroom home in the community you currently live in might run for $250,000, give or take, but a similarly-sized home you’ve set your sights on four blocks over is twice the price. What gives?
Age, repairs and additions, proximity to amenities like schools, parks, and hospitals, the condition of the surrounding houses, the neighborhood’s homeowners’ association, and a myriad of other factors all play a part in the cost of homes in your locale.
Familiarity with the market you’re buying in is key to understanding whether or not you can afford to live there. It’s one thing to know the cost of a home in the area, but what about the cost of living?
Especially if you’re thinking of moving out of town, or even out of state, it’s critical to research what your transition might be like. What do folks in your line of work earn annually where you’re going? What about your partner? How long will your commute to work be, and what will it cost you to pay for gas or public transportation?
Those are all questions of affordability which must be weighed carefully before making any life-altering decisions.
If you’re a first-time homeowner, you may be wondering if buying a home is even a worthy investment in the first place, given the instability of the national housing market within the last decade.
The cost of renting is often more expensive than the cost of buying in the long term, but the obvious catch-22 is that renters who don’t meet income levels high enough to save for a minimum down-payment might never escape the cycle of renting. And so, homeownership tends to be reserved exclusively for middle-class and wealthy Americans.
So that being said, if you can afford to make the investment, there may not be a better time than now.
Currently, mortgage rates are at a record-low, and economists are predicting a continuation of the booming housing market for the remainder of 2021 and well into 2022. That means homeowners can at least rest easy for now with the knowledge that there’s no new housing recession on the horizon.
No matter how you spin it, it takes years of planning, penny-pinching, and careful research to be able to afford your dream home. It’s one thing to handle the cost of buying a house today, but it’s important to ask yourself if you can handle the monthly payments, the insurance, the maintenance, and any unforeseen mishaps.
Remember that you can’t rush important decisions. Good things come to those who wait. Follow our advice and take your time, save your money, and plan your moves carefully and one day, you will find your perfect home.