Are you feeling like you’re ready to stop paying rent? How do you know if you’re prepared to take on a mortgage? Aside from saving up for a down payment, you need to look at your financial readiness. Any bank or mortgage company is going to evaluate you based on your income, credit score, and debt-to-income ratio, but you also need to be prepared for the extra expenses that come with homeownership.
Knowing what factors lenders evaluate and understanding the expenses of homeownership can help you feel confident about when you’re in great financial shape to start shopping for mortgages you can comfortably afford on your budget. The Kemp Group understands that it’s a big leap from renting to owning, and we can help you plan ahead.
Here are some tips to think about when getting ready to stop paying rent and buy a home!
- A down payment of 20% means you won’t have to add mortgage insurance to your monthly payment, but you can get loans with as little as 5% down. It pays to be prepared.
- Income is important, as most lenders want to see that your planned mortgage payments will be about 25% of your monthly budget.
- Your credit score will affect the interest rate on your mortgage loan. The better your score, the lower your interest rate will be. Paying on time and having accounts where 30% or less of the open credit is used will raise your score.
- Lenders look at your debt-to-income ratio. Talk to your local banker about what they look for and how you can improve your finances for a mortgage.
- Mortgage payments are more than just principal and interest, they include taxes, homeowner’s insurance, and possibly mortgage insurance if your down payment is lower than 20%.
- Dreaming of a condo? Don’t forget to add your HOA dues when calculating your monthly costs.
- Save ahead for an emergency fund for your new home. $1,000 is a smart start, but you may want to double that: Keep in mind that a new water heater can cost $1,200 and replacing a garage door can run to $2,000 or more. Sudden repairs or replacements can hit your budget hard, but if you plan, you can absorb those unexpected costs.
- Monthly costs may be different in a house, so look into the average utility bills for a home the size of the one you want.
- Don’t forget to plan for the fees for connecting those utilities and other services, too. Your first month of homeownership will cost a little more, then your costs will settle into a regular budget.