If you are planning to buy a home then it is imperative that you make sure that your finances are in check. Such financial analysis should be carried out well before you venture out for house shopping. Here, we will look at some points you need to look into to ensure you are in a financial sound position to buy your dream home.
Financial Aspects to Check Before Shopping for a New Home
Ensure that there is sufficient liquid capital for the down payment. Lenders nowadays have strict requirements and you need to make specified down payment if you want to purchase your dream house. Banks are making this necessary to reduce the risk of default by borrowers.
Do not sign on the dotted line with the very first lender you receive a quote from. Over the term of the mortgage you will pay several thousand dollars in interest and as such, getting the best interest rate will be quite important.
The aim should be to get the best competitive rate and for this, you need to try out all the options available including online lenders, community banks, and credit unions to know if they can offer good rates.
If you are looking to get a mortgage at good rates, but are not paying the bills on time or the credit cards are maxed out then it can have a negative effect. Additionally, bad credit score or having no credit history will become a hurdle in your path to get a mortgage.
Your credit score informs banks about your overall debt and your ability to clear the bills. If a credit score is low and cards are maxed out then getting finance will be difficult since banks will not be ready to lend to a person who is living on his or her cards.
Check Debt to Income Ratio
It will be important to check your debt to income (DTI) ratio to decide whether buying a home now will be the right decision or not. All you will have to do is divide monthly debts by monthly gross income.
For example, many of the financial institutions do not want your DTI ratio to be more than 45%.
There are a number of fees to be paid at the time of closing such as agent fees, credit report, appraisal, underwriting fees, recording fees, etc. Normally, you will find that the closing cost is between 1-3% of the total loan amount you qualify for.
You will have to think whether you are prepared to take up the responsibility of a mortgage. In this situation, it will be important to consider you responsibilities and lifestyle. Will mortgage negatively affect your life? Will you be able to manage all your responsibilities?
Getting proper answers for these questions will help you decide whether buying a house will be the right decision at the moment.
Last thing to do is ensuring all the financial documents are in place before you start your home search. If required documents are not available then it can delay or create hurdles during loan approval. For example, bank statements, tax returns, employment verification, pay stubs, etc., all should be in place for smooth processing of your loan application.
The Bottom Line
From above details it is clear that before you even think about purchasing a home, it is very important that you make sure that your finances are in place. You need to be sure that you will be able to take up this additional financial responsibility, which will span over multiple decades.