The purchase of a home is one of the most exciting decisions you’ll make in your life. It’s also one of the most crucial, since it will have a massive financial impactful on your life.
Most likely, you’ll be paying several thousand dollars a month for a loan of a few hundred thousand dollars (or more), and discharging the debt for up to 30 years.
Knowing this, it’s essential for you to review a handful of financial checkpoints before moving forward with this decision.
Your goals should be to get a good deal on a home, ensure your purchase fits within your budget, and generate an accurate cost basis around which you can build the rest of your financial strategy.
To accomplish these, you should review the following financial “checkpoints”:
First, evaluate your credit score. This is a measure of your financial trustworthiness, as calculated by one of three credit agencies. Financial institutions will look at this score when they calculate your home mortgage interest rate and decide how much money they’re willing to extend you. The higher your credit score, the bigger the loan for which you’re apt to qualify, and the lower your interest rate will be, generally. If you’re not in “excellent” or at least “good” standing, you might want to take some time to boost your credit score before shopping for a loan.
Next, you’ll want to look at your gross monthly income. Generally speaking, your total home expenses (including your principal, interest, property taxes, and insurance) shouldn’t amount to more than 30 percent of your gross income. So if you make $5,000 per month, your home shouldn’t cost more than $1,500 per month. There is some wiggle room here, but it’s a good rule to keep in mind.
You’ll also have to assess your total debt and your debt-to-income ratio (DTI). Your DTI is weighed by banks when they determine your qualification for a loan. Depending on where you seek a loan, you may not be approved for one if your DTI exceeds 43 percent. In addition, the more debt you carry and the higher your DTI, the more financial risk you’ll run when you try to purchase a home.
How much do you currently have set aside in savings? Most banks require you to make a down payment of at least 5 percent of the purchase price of the property. If you want to avoid paying private mortgage insurance (PMI), you’ll need to have 20 percent set aside. If you don’t have that much available, you should devise a plan to accumulate it.
Shop around for a mortgage among various lenders. You might be surprised by how much the interest rates might vary – even for the same loan product. By choosing a better lender, you could end up saving thousands of dollars in interest payments over the lifetime of the loan.
Of course, interest rates aren’t the only facet you should consider when shopping for a loan. You’ll also want to study a breakdown of closing costs. What are you going to pay to close this loan product? In some cases, the lower interest rate may be overruled by higher closing costs – which may or may not be worth it.
As a homeowner in the Austin area, you’ll be responsible for paying property taxes on your home. This is the amount due each year, based on the adjusted value of your home. It varies from city to city. Traditionally, this is rolled into your escrow account, and broken down to a monthly cost. Either way, you’ll need to know how much you’ll be responsible for covering.
Your lender will likely require you to have a homeowner’s insurance policy on your property. Even if it doesn’t, you’d be wise to get one anyway. Again, shopping around will turn up the best option. Be sure to review multiple providers and get quotes for multiple variations of the policy; you’ll want to budget appropriately and get the best possible deal.
If the property is in a homeowner’s association (HOA), you may have to pay HOA fees. These are collected for a number of purposes, including upkeep of community resources such as parks and playgrounds. Depending on where you live, these fees may be due annually or on a monthly basis. Don’t neglect them when you calculate your costs.
So far, we’ve covered most of the core costs of owning a home. But there are other expenses you’ll need to consider. Depending on where you live, how big your residence is, and how efficient it is, you may find yourself paying high, low, or average utility costs. You’ll also need to set aside some funds for home maintenance and periodic repairs. Depending on the age and condition of your home, 1 percent of the home’s value per year is often enough for those.
Throughout these financial checkpoints, you’ve evaluated debts, income, credit score, and other items. But when you apply for a loan formally, you’ll have to document these values. Before you get too deep into the home-buying process, make sure you have all your financial paperwork together.
It’s also worth checking your current investments (and your total net worth). If you have significant assets elsewhere, the financial risk of buying a home may be mitigated – and you could even consider the option of buying a home all in cash.
Buying a home in Austin can be stressful… but it doesn’t have to be. With the right purchasing agent, you’ll be able to review a wider range of properties, understand your buying options more thoroughly, and ideally, make a better decision.
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