How to Know When You’re Ready to Buy a House?
Much like getting married, buying a house is a lifetime decision and a dream come true. It needs careful deliberation and months of financial preparation, unlike falling in love which just happens. It’s easy to underestimate the commitment of allotting a substantial percentage of your income to amortization for years to come. The following points may help you assess your needs and your current position if you are ready to buy that dream house.
A sizable emergency fund
Consider your current monthly living expenses, subscriptions, and loan payments, and then multiply the amount by four to six. You should have this amount in reserve to ensure that you can meet your monthly amortization in case anything should go wrong. You will also need this fund for emergency repairs every now and then, and they might come more often than you think.
Stable income and job security
If you are contractually employed for only a number of months even with generous compensation, do not expect to magically produce your monthly amortization when your contract ends. Alternatively, if you are in danger of getting laid off or the company you are working for folds up, this may not be the best time for you to buy a house.
Think future needs, not future income
If you are planning to get married and have children, will the house be big enough for your family? Is it reasonably near schools and your work? Is this the city and the neighborhood you want your children to grow up in? Your house should be able to meet your needs for the next ten years or more. If your plans are not yet set for the next ten years, it might be more practical to rent.
Consequently, you should also be able to afford your amortization for the next few years. Never count on future promotions or salary increases if you cannot afford your amortization today because you will get in trouble if they do not come. As the saying goes, do not count your chickens before they’re hatched.
The benefits of a larger down payment
The amount of your down payment has an inverse relationship with your amortization. Hence, a larger down payment will reduce the amount of your amortization or shorten the payment period. It can also give you a wider choice of lender and choose a lower interest rate. However, do not be tempted to put in your emergency fund just to come up with an adequate down payment.
Don’t forget the furniture. Factor in the furniture you will need before moving in while saving up for your down payment.
Eliminate smaller debts
Lenders generally look at your debt-to-income ratio to assess if you are capable of meeting your monthly amortization. Simply put, this is the percentage of your income which goes into paying your debt. To improve your debt-to-income ratio, finish off your smaller debts before your apply for a housing loan. You can negotiate for better terms with some lender if you have a better ratio.
No ‘Love at first sight’
Buying a house is a numbers game – browse through 100 properties, sort the top 25, visit 10 properties, before you buy the perfect one. No matter how much you feel that the property is perfect for you, check the property at least three times before you close the deal. If you can, check the property in not-so-good weather so you can understand better what you’re signing up for. Remember, this is not a decision you can easily undo when the going gets tough.
It’s not an ‘asset’
Your home may be increasing in value as the years go by, but it will not help you pay your amortization unless you sell it. Keep in mind that owning a house will also incur upkeep costs, like repairs, maintenance, and utilities. In this sense, your house may be your biggest investment but it will still take money out of your pocket.
If your long term plans take an unexpected turn and you need to relocate, keep in mind that selling your home will take some time. If you are selling in a hurry, you might be forced to sell your property at less than ideal price.
Buying a home is a major personal decision, but do not let this stop you from making your dream a reality. All it takes is a lot of careful planning and a pint of courage. Review your plans if you have covered all sides covered and take that leap of faith.