Buying a home is a huge milestone in anyone’s life. It means you have reached a heightened level of financial security. It also means that you are ready for greater permanence. As you consider whether you are ready to purchase a home, your top consideration should be whether or not you can afford it.
Here are some ways to determine if you can afford a home.
Find Out What You Need to Save
The first step in any home purchase is saving for a down payment. Some home loans only require a 10% or less down payment. One example of this is the Federal Housing Administration (FHA) loan. FHA loans are insured by the U.S. federal government and are intended for people who might otherwise struggle qualifying for a loan. With FHA loans, your credit score will affect the amount you are required to pay as a down payment.
This is an affordable option for many first-time homebuyers. You can calculate the amount you need to save once you figure out two things: how much you can spend on a home and your required down payment based on your credit score.
Look at Your Job Security
Your lending institution will assess their risk in lending you money based on several factors, including income and job security. Your lender will most likely ask for copies of the last several months of paycheck stubs to verify your income and show that you have held the job long-term.
But don’t worry. Lenders understand that no borrower’s financial situation is guaranteed. Loan modifications can help you afford mortgage payments if your financial situation goes bad.
Follow the 28% Rule
Financial experts recommend dedicating no more than 28% of your monthly gross income on mortgage payments. Of course, this number includes principal and interest as well as homeowner’s insurance and property taxes. There are online tools that calculate your maximum monthly payment; or simply multiply your gross monthly income by .28. Resist the temptation to purchase a home that you can’t afford. Few things are more stressful than scraping to make ends meet. Plus, you don’t want to risk losing your home.
Buying a home is an exciting time of life. After all, it is a huge part of the American dream. Just make sure that you aren’t one of the approximately 150,000 foreclosure filings that occur in the United States each year.
Do your homework and purchase a home that you can afford!
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