Signs You're Ready for Your First Mortgage
Buying your first home is a big step that will affect you for the rest of your life. You do not want to take on a mortgage unprepared. For that reason, we have put together this handy guide to determine if you are ready for your first mortgage.
Do You Have a Regular Income?
This may appear to be a no-brainer, but determining how safe your income is can be deceptively difficult, especially in light of the COVID-19 virus's economic implications. You should be able to demonstrate not only that your income is secure for at least the next few years, but also that you have a history of solid employment.
As proof of income, lenders will require at least two years of tax returns or pay stubs. Lenders prefer to see the money you'll need for a down payment placed for at least 60 days in a bank account. It proves to them that you have the funds to pay off your mortgage. If you're counting on gifts from family and friends to help with a down payment, make sure you obtain them as soon as possible before applying for a mortgage and depositing the money.
Getting a mortgage can be especially difficult if you're one of the 57 million Americans who are self-employed and don't have a regular paycheck. The importance of paperwork in this case cannot be overstated. Make sure you have two years' worth of bank statements that a lender can use to verify your income.
Are You Down Payment Ready?
You may have heard that a down payment of 20% of the purchase price is required when purchasing a home. Some experts believe that requiring a 20% down payment on a property is a "modern-day myth." Many lenders will take as little as a 3% down payment. According to Rocket Mortgage, the average down payment in 2022 will be 6%.
Coming up with a down payment might be difficult for potential homebuyers. It's difficult to acquire tens of thousands of dollars. Link your down payment with your post-closing goals for the home.
Is there a lot of work that needs to be done on the house? Are you in the market for new appliances, flooring, or roof repairs? To prevent taking out another loan or accumulating credit card debt, a lower down payment may be required. The correct home upgrades can also raise the value of your home and your equity.
Bear in mind, though, that borrowers who put down less than 20% on a home must pay private mortgage insurance. In the event that you default, PMI prevents the lender from losing money. PMI is normally included in your monthly mortgage payment and can cost anywhere from 0.5 percent to 2% of the loan amount. (Once you've paid enough on your loan to achieve 20% equity, your lender should stop charging you PMI.)
Of course, putting down as much money as possible up front will save you money on interest during the loan's term. You wish to buy a $200,000 house, for example. You have a decent credit score and qualify for a 30-year fixed-rate mortgage with a 3% interest rate. If you put down 20% on a house, you'll end up paying $82,844 in interest over the life of the loan. If you just put down 6%, your total interest payments would be $97,342 — a difference of nearly $14,000. A larger down payment can also mean a cheaper initial interest rate.
There are two sorts of mortgages that allow you to finance your entire home. USDA and VA home loans do not require a down payment. According to Policy Advice, the value of mortgage debt in the US in 2021 was $16.01 trillion. Do not become part of that statistic.
How Long Do You Want to Stay in the House?
Are you looking to buy a home in an area where you plan to stay for at least five years? What exactly does it take to raise a family? Are you getting older? Is my job going to stay in this area for the next two, three, or four years? A house represents a significant long-term investment. The usual length of homeownership in the United States is 13 years, according to the National Association of Realtors, and the average tenure has been increasing over the last decade.
If you plan on only staying in a given region for a few years, consider closing expenses, which can vary from 3% to 4% of the home's sales price, as well as the cost of renting. You can use a rent vs. buy calculator to analyze the costs of renting vs. buying a home in your area to see if and when buying a home is more cost-effective than renting.
Do You Have an Emergency Fund?
An emergency fund can keep you afloat if you lose your job or help you pay for unexpected bills. Most experts recommend having enough money in a savings account to last three to six months — and homeowners may need more. Home maintenance and repairs are necessary, especially when purchasing older properties that may require renovations. Being able to purchase a home but without the funds to repair it will only worsen your financial condition.
According to HomeAdvisor, homeowners spent an average of $3,100 on upkeep and $1,600 on emergency repairs last year. While newly constructed homes may not require immediate repairs, setting aside money for the future is a good idea. According to Realtor.com, a decent rule of thumb to follow when budgeting for home repairs is to set aside between 1% and 4% of the home's worth, with a higher percentage for older homes.
How Much Can You Afford to Spend?
Knowing how much house you can afford requires a thorough understanding of not just your monthly payments, but also closing expenses, insurance, and taxes. If you're upgrading to a new home or a renter searching for your first property, compare your current housing expenditures to a new mortgage payment.
Using a mortgage calculator is a smart approach to figuring out how much house you can afford. You can use a mortgage calculator to examine how your monthly payment would change if you changed down payment amounts and interest rates. As a result, you'll have a better idea of how much you're willing to pay.
When it comes to determining affordability, most financial gurus advocate using the 28/36 rule. This means that mortgage payments should account for only 28% of your gross monthly income, while overall debt should account for 36%.
Can You Sacrifice?
You should evaluate how a property fits into your lifestyle in addition to being comfortable with your financial ability to pay a mortgage. Do you, for example, enjoy eating out every weekend? Is it a tradition for you to take a vacation every year? Will the expense of a mortgage allow you to keep doing the activities that make life enjoyable? Is owning a house in your future plans, such as growing a family or starting a business?
Buying a house is a step that requires planning. Do you have a steady job, can you afford the down payment, do you have an emergency fund, how long do you want to live there, can you afford to spend that much on a mortgage, and can you sacrifice luxuries? If you answer yes to most, you are ready for your first mortgage.