How To Make Sure You Can Afford Homeownership
posted in Mortgage News
The single most effective way to make sure that when the time comes to purchase your first home, you’re able to afford it, is by taking the time to conduct thorough research, and being honest about your income and expenditures.
Firstly, find out every potential cost associated with becoming a homeowner, and talking to a real estate agent, mortgage broker and financial advisor can help you get to grips with this. Having a rough idea of how much it will cost, simply won’t be enough; you’ll need to calculate your income, other expenses that you’ll incur, such as your mortgage, home insurance, property taxes and utilities among others, and sit down with all the figures in front of you. Once you have a better idea of what your outgoings will approximately be each month, you’ll be in a much stringer position to know whether homeownership is currently viable for you. Next, you should compose a balance sheet containing all of your income and expenses, and see if you can afford to spend that amount each month.
To help you carry out these steps, here is a short, but hopefully helpful, guide:
Start with your income
Try to make your calculations as accurate as possible, and understand exactly how much money you bring in after taxes and other deductions, every month. You can’t spend more than this amount each month, and resist the temptation to be generous with the truth! Honesty is key here.
Then, seek a mortgage pre-approval
Pre-approvals can give you a clearer idea of how much a lender is likely to approve you for, but it’s important to remember that this process doesn’t account for any other existing debt that you might have, or any expenses. Pre-approval is great for giving you an idea of what you might get, but it doesn’t always mean that you can actually afford it.
Think about home insurance costs, HOA fees, property taxes and utilities
While some of these expenses may not change a lot when you buy a property, especially if you’re already living in your own home, it’s important to consider whether any of them may increase when you buy a new home.
How much consumer debt you have?
Whether you’ve got credit cards, car payments or a student loan among others, lowering your debt-to-income ratio by paying off as much as you can, is always going to go in your favor when searching for a lender.
Remember that a mortgage broker can help you search for an appropriate lender, and may even have access to mortgage deals that you wouldn’t ordinarily be privy to.
What other expenses do you have?
On average, homeowners spend around 1% of the price of their home on maintenance and repairs every year, so it makes sense to have a small fund set aside to help you cope in the case of unexpected issues that need to be addressed. Don’t have enough money to be able to set any aside; can you really afford homeownership?
Track all expenses and create a workable plan to put into practice
Once you’ve spent time accurately calculating your average spending and outgoings every month, it’s time to create a workable plan to cover all costs associated with homeownership, and living by it for a couple of months (or for as long as you feel necessary) to help you determine whether you’re in a strong position to buy a home.
Homeownership can be a wonderful thing, and for many, it’s a real game changer, but going into it without a clear and honest picture of your finances, is only ever going to backfire on you.