Although the real estate market has shown signs of rebounding, there are still plenty of deals to be had. A surplus of housing stock, combined with low interest rates makes it a good time to consider home ownership. If you have always dreamed of owning your own home, you might be tempted to take the plunge – only to get cold feet at the thought of commitment.
As with most major life decisions, it is normal to feel apprehensive about taking on such a huge responsibility. Most people experience doubts about making an offer on a home, even after months of saving and preparation.
So how do you know when you are finally ready to buy? The following checklist is a start to determining whether you are prepared to be king (or queen) of your own castle.
Sign 1: You stick to a budget
When you rent, you generally do not have to worry about incidental expenses, such as replacing an air conditioning unit or spending half your paycheck on a new water heater. As a renter, your landlord took care of these unexpected emergencies. With a house, however, you are on your own. If something breaks, it is your job to fix it or replace it. Without a solid budget in place, you might feel like you are forever putting out fires with your hard-earned cash. Budgeting allows you to manage your incoming and outgoing cash, so you know exactly how much house you can really afford.
Sign 2: You have saved money for a down payment and closing costs
If you are going with a traditional mortgage, you will need to put down 20 percent cash toward the purchase of your home. For example, if you are buying a $150,000 house, you will need a down payment of $30,000. If this is out of your reach, there are other financing options available, such as an FHA loan. Guaranteed by the federal government, these loans allow buyers to purchase homes for as little as 3.5 percent down. If you go this route, however, you will end up with a higher monthly payment. You will also most likely have to pay mortgage insurance, which protects your lender if you default on your loan.
You must also factor in closing costs, which generally make up between 3 and 6 percent of the home’s purchase price. In many home sales, however, sellers agree to bear these costs.
Sign 3: You have a stable career
Taking out a mortgage is a huge commitment. If you default, the damage to your personal credit can stop you from making other significant purchases for years to come. Foreclosure can also cost you thousands of dollars, bad credit, and a damaged reputation. If your lender obtains a court judgment against you, it can even garnish your wages. Before you purchase, consider whether you have the job stability to maintain a consistent cash flow. If your paycheck is unreliable, it is not a good time to buy.
Sign 4: You have a healthy emergency fund
Life always throws curveballs. An unexpected health crisis, a new baby, or a divorce can leave you reeling emotionally as well as financially. If you need to take time off work for an extended period, make sure you have the reserve funds to continue paying your mortgage on time.
Sign 5: You are not burdened by debt
When you apply for a mortgage, lenders take a hard look at your debt-to-income ratio. This figure shows how much money you are bringing home versus how much you are paying out. According to generally accepted industry standards, your total debts, including your mortgage, should not consume more than 36 percent of your monthly income. Having a bunch of credit cards siphoning away your income each month, consider paying them down before you apply for a mortgage.
If one or two signs are missing from your checklist, all is not lost. If you truly want to own your own home, you can always find a way to realize your dream. Whether you create a detailed budget or pay off some old debt, your path to home ownership might be shorter than you think.