So you made your life-changing decision to buy a house. Now it is the right time to take a step back and decide whether it is reasonable to make this kind of decision right now. Buying a home is a complex process that requires a big amount of time, money and patience.
Here are some questions that are absolutely necessary to be asked before the purchase:
Is My Credit Report Good Enough?
It is extremely important to check your credit report and score. The first thing lenders want to know is how much of your monthly income goes towards debt payments (debt-to-income ratio). This ratio is expressed in a percentage of your personal debt. Luckily, you have the possibility to check online your credit. According to the law, you’re allowed to receive one free copy of your credit report per year, by clicking here. Do not hesitate to check your report for mistakes, because even the small ones can cause rejection.
You can calculate the debt-to-income ratio manually, by taking your total monthly debt load and dividing it by your monthly gross income. It is important not to confuse debt income ratio with credit utilization, which is the amount of debt you have related to your credit limits.
To calculate your DTI divide your monthly debt spend (mortgage, minimum credit card payments, car loan, student loan, alimony/child support payments, other loans) by your monthly income (Income from wages, alimony/ child support, bonuses or overtime, other income) and then multiply by 100.
- If your result is 36% or less - it means you have the healthiest debt load for the majority of people. Avoid gathering more debt.
- If your result is 37% – 42% - it means that your position is not that bad, but you should start reducing your debt in order to get on a better financial position.
- If your result is 43% – 49% - you are in a sort of financial trouble. Start paying your debts in order to prevent debt overload.
- If your result is 50% or more - You are in the position of serious financial debt. Don’t hesitate to seek professional help!
How Much Home Can I Afford?
You can determinate whether you’re standing firmly on your feet using numerous online mortgage calculators. Do not forget that the true cost of buying is much bigger than it may look from the first sight. Consider factoring in: mortgage arrangement fee, valuation fee, legal fees, stamp duty, surveys, removal costs, home repairs, furniture and extras. Here is a useful mortgage calculator that will help you in your buying process. Do not forget the golden affordability rule: your monthly housing costs shouldn’t be more than 32% of your gross monthly income and that your entire monthly debt load should not be more than 40% of your gross monthly income.
Note: Don’t try to chase the market because the only perfect time to make a home purchase is when you’re financially and emotionally ready to take these responsibilities.
Is That Lovely House Good Enough For Me?
Make a wish list for your future residence. Setting up personal quality standards is an essential trait that can help improve your life status. Take into consideration all the aspects that involve living in your personal house: neighborhood (appearance, condition of nearby homes, traffic, noise level, safety, pet restrictions, age mix of inhabitants, parking, zoning regulations, fire protection, snow removal, garbage service); schools (reputation, play areas, busing distance); Convenience to supermarket, work, shopping, child care, hospitals, public transportation, etc.
Also, ask yourself how many bedrooms and bathrooms do you need? Is this house big enough to fit your family? Does it satisfy all of your personal needs?
Is This Deal The Best That I Can Have?
Make a full research of what each lender has to propose to you and negotiate the best deal. Lenders tend to price their homes a bit high, but your task is to find the perfect solution that will fit your pocket. After that, you can make an offer on the home.
Ask your lender or broker all the information that you need (ex. how many offers did he have on this house? How long has it been on the market? What renovations have been done? Have there been any subsidence problems?) Check the electrical and gas installation check/reports as well. Make sure the house you want to buy is not going to give you headache in future.
Is This The Right Mortgage For My Situation?
There exist a lot of types of mortgage programs, but you should be acknowledged with three basics: adjustable rate, fixed rate and interest-only.
- A variable-rate mortgage (adjustable rate) – is a short-term mortgage loan with an interest rate that is fixed for a short period of time, usually between one to seven years. In time, the interest rate can adjust every year up or down, depending on the market. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
- Fixed Rate Mortgages (FRM, also known as “vanilla wafer”)- is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan. It is a more traditional kind of loan for a longer period of time, generally for 15 or 30 years. It is issued for people that plan on settling down in their home for a long time.
- Interest-only payment- Is a kind of payment that incorporates both fixed and adjustable rate mortgages. It means that for a certain period during the loan term, you’re allowed to pay only enough to cover the interest portion of your payment.
Note: Do not forget to ask your lender all the questions that you have, because one way or another the misinformation will affect you drastically.
Is the perception of my future home close enough to reality?
In order to secure your family and your budget from potential inconveniences make a full home examination. This will help you anticipate all the conceivable issues. Make an examination of the structure and mechanical systems.
Scan the exterior (trim, wall coverings), the interior (walls, ceilings, fireplaces), the structure (sub-structure, foundation), roofing, electricity (service panel, branch circuits), heating, plumbing, insulation, etc.
Being aware of all the existing problems will essentially reduce all the risks.
Also, consider checking your potential house in different times of the day in order to see what it looks like when the neighborhood is coming back from work.
Did I gather all the information needed?
Different lenders can set different prices, so consider contacting several agents in order to get the best price. Learn how much of a down payment you can afford and find out all the costs involved in the loan. Make an investigation about the same loan amount, loan term and type of loan. Don’t be shy, check what needs to be paid if a sale collapses, check for hidden extras. Ask about the loan’s annual percentage rate that takes into consideration not only the interest rate, but also broker fees and certain other credit charges.
What is a Down Payment?
Down Payment is a concept that covers the payment used as the initial upfront portion of the total amount dues and it is traditionally given in cash at the time of finalizing the transaction. Some lenders require 20% of the home’s purchase price but sometimes 5% on conventional loans might be enough. Don’t be anxious about asking too many questions. Ask about the lender’s requirement for a down payment, what special programs may he propose, ask about the total cost of the insurance. With a larger down payment, you will likely need to take on a smaller loan and can afford to buy a higher-priced house.
Do I Need a Lawyer In My Home Buying Process?
The closing process, when the title passes from seller to buyer, is the most important part in the sale transaction. A lot of closing papers indicating the debits and credits must be professionally done. Usually the broker serves the seller, and the buyer uses the lender’s services. It is necessary to make sure that the transaction goes well. The Home Buying process is very difficult and nerve-racking, so don’t hesitate to ask for professional help.
Also, remember that buying a house is an enormous responsibility that involves a lot of financial and human resources. Don’t be immature and think wisely whether you can afford this purchase. Take your time and make an in-depth pros and cons analysis.
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