Buying a home is one of the most exciting and memorable moments in life.
You get to decorate your own property and set down roots, all while gradually increasing your net worth.
However, recently, there’s been a rise in people who aren’t prepared to buy a house. Or worse buying a house they can’t afford, resulting in debts that can’t be paid.
To avoid this, be aware of several things.
Save up for a down payment
In most cases, saving for a down payment is necessary, and in most cases, the down payment is equivalent or greater than 20% of the property price will result more favorable mortgage rates and payments.
If you fail to reach this mark, then you’ll have to pay for a private mortgage insurance called PMI. In some cases, the lenders will make your MI for you and your interest rate will be slightly higher.
PMI has an annual cost of between 0.1% to 2% of the total amount borrowed depending on the credit scores, percentage of down payments, type of transactions, type of properties, and/or debt to income ratio.
In other words, it is possible to have a loan of $300,000 and the mortgage insurance can be as much as $500 a month (or $6,000 a year) which is on top of the monthly payments.
Though you pay for it, this insurance doesn’t protect you; it protects the lender and makes sure that they get their money back if you stop making payments and they have to take back the property.
You can request to have the PMI dropped when you’ve paid 80% or less of your home’s ORIGINAL value and the PMI will automatically be dropped when your loan balance is 78% of the original value based solely on the initial amortization schedule. If you would like to use the current value of the property, the loan must be paid at least 2 years with an acceptable payment history, AND the loan to value based on the current appraisal be 75% or lower if less than 5 years have elapsed from the loan originally closed OR 80% if more than 5 years have elapsed from the loan originally closed. There may be more requirements depending on each mortgage insurance company.
If the lender has been paying the PMI on your behalf, you should discuss the refinancing options with a mortgage professional to decide whether refinancing your current loan will work toward your advantage.
However, to reach that point it’ll take years; years that you may not be able to afford.
Have an emergency fund
Becoming a homeowner could bring with it unseen costs.
If your water heater breaks down or you need a new roof, it’s up to you to fix it—not your landlord.
Try to save up at least 6 months of living expenses as an emergency fund. If you can do this before buying a home, you can move in with much less stress and worry knowing you are prepared.
Make sure the home is affordable
The current lending guidelines may allow a debt ratio to be at 50% of the gross income. For example, all debts combined (such as car loans, credit card monthly minimum required payments, home mortgage payment, property taxes, homeowner insurance, homeowner association dues and etc.) can be as much as $1,000 if the gross monthly income is $2,000. Too many Americans are house-poor, which means that they’ve spent too much on their home and don’t have enough left for other things. I always recommend to discuss your financial goals with a mortgage professional to find out how much loan to borrow and how much monthly payment to expect. It is important to be able to make your life comfortable and perhaps to save for other financial goals.