How to Decide if You're Ready to Buy a Home: Checklist
Buying a home is a big step in your life, especially if you have never owned a home before. There are the obvious costs and considerations, such as the downpayment on a mortgage and the time and expertise a "fixer-upper" would require, but how do you decide if you're ready to buy a home? It's never an easy choice, but the following checklist will help you organize your thoughts and better weigh the pros and cons.
Your Work History
___Have you been steadily employed for the last two years?
___If you have recent gaps in your employment history, what caused them?
___If you changed jobs, did your pay match or exceed the pay from your old job?
___Has you income fluctuated during the last two years? Why?
Your Credit History
___Do you pay your bills on time?
___Do you carry large balances on your credit cards?
___Have you ever defaulted on a loan (including your student loans)?
___Have you obtained copies of your credit report directly from all three of the companies that collect the data lenders depend on? The companies are Equifax, TransUnion, and Experian (formerly known as TRW).
- What do your credit reports say?
- Are your credit reports accurate?
- Are there items on your reports that a lender might deem unfavorable to you?
- If you currently have loans you owe, do you send in the monthly payments?
- If you have long-term loans, how long do you have to pay them off?
- Do you pay your rent on time?
- Have you every had property repossessed?
- Have you ever had a bank foreclose on your house?
- Have you ever had a creditor turn your account over to a collection agency?
- Has a court entered a money judgment against you that you haven't paid?
- Have you ever filed a bankruptcy petition? How long ago?
___How much have you saved?
___Are you setting aside money on a regular and consistent basis?
TIP: The down payment usually is at least 5% of the price of the house you want to buy.
TIP: You could save your money in a financial account that pays more in interest than a regular savings account and your money will grow faster.
TIP: Your employer may have direct-deposit options for you, and you could designate a set percentage of your check to be deposited directly into your down-payment account every time you get paid.
How Much Can You Afford?
Mortgage lenders have legal limits on how much money they can lend you, so you need to have a good understanding of where your dream home fits within those limits.
__How much do you earn and how much you spend each month?
TIP: Lenders look at the total amount you pay for housing each month, add costs like property tax, insurance premiums, and any homeowners' association fee and compare it to your monthly gross income. They generally try to keep the amount of the loan low enough so your monthly housing costs do not exceed 28 percent of your monthly gross income.
TIP: Lenders also look at your other long-term debts, such as your car loan, student loans, credit-card debt and the like to see what other monthly payments you have to make. They add these monthly costs to your monthly housing cost, and compare the total against your gross monthly income. These two kinds of costs taken together should not exceed 36 percent of your gross monthly income.
TIP: If your gross monthly income and your debts exceed these two guidelines, you'll need to adjust your expectations. You will need to decide whether to wait until your cash flow improves and your savings are larger, or whether you should set your sights on a lower-priced house.
Getting Prequalified for a Loan
A smart buyer starts shopping for a loan before he or she starts looking for a house, and certainly before making any offers! Being prequalified for a loan means that a lender has looked at your finances and credit history and has decided that you can get a loan, and how much you can borrow.
TIP: When you're prequalified, you may speed your search for your home because you will be able to focus on homes in your price range.
TIP: When you're prequalified and you find your home, you will be able to make an offer you can stand behind. People who aren't prequalified make offers contingent on getting a loan. If you were the seller, wouldn't you rather work with somebody you know can get financing?
Not Sure Whether You're Ready to Buy a Home? Get a Free Attorney Match
So you're still on the fence whether you're ready to spend several hundred thousand dollars (plus interest) on a home you'll probably have for several decades? Don't worry; you're definitely not alone. It's a tough decision that requires a clear understanding of your assets and liabilities. Don't go it alone; get started with a free real estate attorney match for some peace of mind.