There may not be a better time to buy a home. Interest rates are low as are home prices. If you are a first time buyer looking to purchase your first home, you are lucky to do so in such a good environment. However, even though the time might be right economically, make sure you are prepared financially first. The lowest interest rate doesn’t help you if you ultimately can’t afford a home.
To see if you are ready, consider these standards for home ownership:
1. Do you have an ample emergency fund? Experts disagree if you should have as little as a 3 month emergency fund or as much as a 12 month one, but somewhere in the middle is good. Ultimately, you should have enough money in the bank that you could survive for many months should you become unemployed or injured or lose an income source. Losing income is stressful enough; it is even worse if you are scrambling to make a house payment.
2. Is your credit score high enough? To get good interest rates your credit score should be at least 720, if not higher. If your credit score is lower, take a few months to step away from the house hunt and instead focus on improving your credit. Doing so will help you score a better interest rate and save you thousands of dollars over the life of your home loan.
3. How much debt do you have? Ideally, your total debt load, including your mortgage payment, shouldn’t be more than 33 to 36% of your gross monthly income. If yours is higher, the bank likely won’t approve your loan, but if you are approved, you could have a hard time meeting your obligations. Again, taking a break from the house search to pay down some debt is a good idea. A mortgage calculator is a great too to understand what you can or can’t afford.
4. Do you have money for property taxes and repairs? Don’t forget that you will also have to pay property taxes (which can be costly in some areas) as well as set aside money for house repairs when they come up. Two to four percent of the home’s value is what you should be setting aside each year to handle repairs. Is there room in your budget for these expenses?
While now is a great time to buy, make sure you are not acting prematurely. Put your finances in order first, and home ownership will be a joy. Buy a house before you are financially ready, and it could simply be a burden.