It all appears as a fancy picture when you first think of taking the leap and buying your dream home. You will have a roof to call your own, a house that you can decorate as per your likes, and of course a property that would add to your wealth portfolio. But, are you sure you are ready to buy the big asset?
Leading moving companies in Jersey City in the network of Moving Apt claim that signs of worry can be easily noticed on the face of people moving to their new homes. When it is such a joyous occasion, what would one be worried about? Well, this happens when you fail to check your affordability before making the big decision.
Experts advise having strong financial planning before investing in a house. Checking your affordability covers a lot of aspects right from the debt-to-income (DTI) ratio to mortgage rates.
In this post, we have discussed all these factors in detail to help you check if this is the right time for you to make a big investment.
What is the Debt-to-Income Ratio?
Having a clear understanding of the Debt-to-Income Ratio is integral to the right house-buying decision. If you have ample cash with you, buying a house is no big deal. Even if you do not have cash for the purchase, you can easily apply for a home mortgage option from a reputed financial institution. But the big question is- How much mortgage can you afford?
The Federal Housing Administration (FHA) has guidelines that approve a 43% debt-to-income (DTI) ratio. With this ratio, it is calculated if a debtor can make the rightful repayments in time. However, some other lenders consider a more lenient approach and may offer mortgages with a lower DTI.
A 43% of DTI means that you can easily cover your loan repayment along with other expenses such as a mortgage, mortgage insurance, homeowners’ association fees, property tax, homeowners’ insurance, etc. your gross income should be more than the total of all these expenses to ensure you have a smooth experience with a home mortgage.
Know what mortgage lenders are seeking?
Having a clear understanding of what a mortgage broker wants from you is imperative. Along with the debt-to-income ratio, you must also consider the front-end debt-to-income ratio which is an understanding of your monthly expenses due to the mortgage. Some common inclusion in it is mortgage payments and mortgage insurance.
Now lenders won’t offer you debt if you are at the margin of the debt-to-income ratio. They won’t give you a loan either if you are already bearing another debt under your name. Why would they do that? Well, no lender wants to make a partnership with someone who is already living on the edge. This means that you can anytime break down and cost the lender a huge time developing into a bad asset.
A home mortgage is a big commitment and when buying a house, several other expenses would come up to you. You must consider all the aspects before making any decision as any mortgage you take would have you repaying the instalments for the coming 25-30 years.
What about the down payment?
Before we answer this question, let us first understand what a down payment is.
You cannot buy a home on the full mortgage and need to put down some amount out of your pocket, the sum you deposit on your own is known as a down payment. Moreover, it is best recommended to pay 20% of your total property price on your own to save expenses on private mortgage insurance. This is the insurance that protects the lenders in case you fail to repay the debt.
There are other reasons you would like to make a down payment on your own including your plans to sell the property in the future, or considerations to convert the property into an investment option.
You must understand your affordability and future income stream to ensure your safe house-buying decision. A down payment thus becomes integral to a wise house-buying experience.
What else should you bear in mind?
As a prospective home buyer, you will have to hustle with a lot of things when it comes to affordability. The housing market is changing and the price of the property remains a constant concern., apart from the price, you must also be focused on:
Rate of interest
A very important aspect of calculating your affordability is checking the prevailing interest rates in the market, the interest rates would affect the amount you pay for several years to come as debt repayment. You must wait before you buy a property when you see the interest rates falling. However, if they are going uphill, it’s better to haste a home-buying decision.
Time of the year
Yes, to your surprise, the time of the year also affects the home buying decision. The variety of houses available for sale depends on the season and Spring is by far the best one to venture into the market. Similarly, winter is the worst time for house hunting and so is summer, partially.
Buying a house is a big decision to make and you must not leave it on luck or take steps without consideration, make sure you factor in all aspects of the mortgage and have a clear understanding of your affordability before you buy your dream home.
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