Financial Considerations
Do you have a stable source of income?
It goes without saying that anyone purchasing a new home will want to have a stable source of income, but what you may not know is that there are more aspects to consider than just the amount you earn on a monthly basis.
For example, Rocket Mortgage explains that your lenders like to see one to two years of pay stubs and W-2s from the same job. So if you just changed companies, you may want to wait a bit until you apply for a loan so that you can show your new job is stable. Those who have just received promotions may want to wait a few months to show their new income level. For those who are self-employed, the loan application process may be more intensive since you’ll need to provide extra documentation like tax returns for the last two years or so.
As you calculate your income, don’t forget to add in all sources of revenue if applicable, including things like social security income, child support payments and alimony payments, military benefits and allowances, commissions and overtime, etc.
Is your savings account healthy?
Aside from having a stable source of income, you’ll also need to have a certain amount of money set aside for your down payment, as well as leftover money in your savings account to function as an emergency fund. While there are programs that allow you to make a down payment for as little as 3% or even no down payment at all, most lenders prefer a down payment of at least 5%. The average down payment for first-time homeowners is just 6%.
Keep in mind, however, that the larger your down payment is, the lower your monthly payments and interest will be. If you are able to put down 20%, your mortgage insurance will be waived, reducing your payments. The amount you should put down on your house is circumstance-specific. For more information on the smartest down payment for your situation, check out this article featured on The Mortgage Reports.
Additionally, you’ll need to ensure that you have enough money left over in your savings account after your down payment. Many financial advisors recommend setting aside an emergency fund that can cover 3-6 months of living expenses.
Is your debt under control?
Next, it’s time to assess your debt to income ratio, commonly termed your DTI. According to Investopedia, most lenders like to see a DTI that is below 36%. You can calculate your DTI by adding all monthly payments that go toward paying off existing debt (car loans, student loans, credit card payments, and your new mortgage) and dividing this number by your gross monthly income.
Keep in mind that no more than 28% of that DTI should be for your new mortgage. In other words, if your current DTI is at or below 8% of your gross monthly income, you will be in a better position to get a more favorable home loan. Of course, the ideal is to pay off all of your debt before purchasing a home, but this is not a universal rule and is not the case for many home buyers.
Can you comfortably afford your new monthly payment and other home expenses?
While we’ve already recommended that your new monthly mortgage payment remain below 28% of your gross monthly income, you should also make sure that your other living expenses make this percentage relatively comfortable for your lifestyle, or else be willing to reassess spending priorities to allocate more toward your home loan. Making your monthly house payment should not be a heavy financial strain.
Keep in mind that your new home purchase comes with other new expenses. For example, though most lenders include property tax payments in the mortgage, you’ll want to ensure this is the case. As a homeowner, you’ll also need to be prepared to address any unexpected home repair costs. Of course, if you’re purchasing a new home, this will be a much smaller concern since reputable builders will provide a year warranty.
Other Considerations
Are you ready to settle down?Not all home purchasing considerations are financial. Perhaps the most important question you can ask yourself before purchasing a home is whether or not you’re ready to settle in the area you’re purchasing. Unexpected moves occur for everyone, but if you can already see yourself moving to a new location within the next five years, it’s probably not the best time for you to purchase a home. Purchasing homes, selling homes, and moving costs are not expenses you want to take on unless you’re ready to make an investment in the area.
Do you have other goals that are more important than buying a home?Even for those who plan to stay local for the next five years, it’s smart to carefully evaluate your life goals. If you have other ambitions that require a significant financial investment, and if those ambitions are more important to you than buying a home, the time is probably not right for you to buy. These goals can be anything, from going back to school to throwing a large wedding party to traveling extensively. Before you buy a home, you need to know it’s your top financial priority for the near future unless your budget embraces multiple possibilities.
Is the current buying market favorable?Beyond all of your personal financial realities and life goals, it’s also a good practice to ask yourself if the current housing market is favorable for buyers. While this varies based on location, it’s safe to say that the current market is favorable for buyers and sellers alike as a general rule. After the pandemic, many people find themselves relocating to be near friends and family or to take new jobs, so there’s a significant amount of turnover in the market, giving many buyers and sellers great opportunities. Be sure to check this general reality with your local market. You can find Delaware-specific statistics related to the housing market at Delaware Business Now.
