Sometimes, you can afford to shrug your shoulders and just take a chance because the consequences of getting it wrong simply aren’t that bad. If you order something new off a restaurant’s menu while you’re out for dinner with friends and discover that you don’t like the taste of it, then you can always eat a snack to quiet your rumbling stomach when you get home. In other situations, you need to make your decision carefully because the consequences can be far more dire. Buying a house is a fantastic way to build wealth, but buying a house that you can’t afford can wreak havoc on your finances and set you up for years of struggle. Do you understand how to know if you can afford a house?
How to Know If You Can Afford a House
It’s easy to dream about being a homeowner. When it comes to determining how to know if you can afford a house, things get a bit trickier. Asking the following questions can help you figure it out.
Do I Have a Stable Income?
Lenders want to know that borrowers will be able to repay them. As CreditSesame reports, having a stable income from regular employment is a key factor in convincing them that you’re a good candidate for a home loan. It’s hard to build a persuasive case without it.
Do I Have an Emergency Fund?
An emergency fund is there to tide you over and make sure you can meet your financial obligations, including your mortgage payment, when the unexpected happens. It could be a period of unemployment, a medical emergency, or a sudden house repair. According to Money.com, an emergency fund should be living expenses for at least three to six months. However, homeowners may want to stash more cash in their rainy day funds, especially if they own older homes. Having extra funds put aside provides extra cushion for surprise home repairs.
Do I Have the Down Payment?
Aspiring homebuyers hear a lot about down payments. As Investopedia explains, the amount that you’ll need depends on the type of loan that you plan to use, your financial situation, and your goals. If you’re using a conventional loan, you’ll need to either come up with a 20-percent down payment or pay private mortgage insurance, which can add between $30 and $70 to your monthly mortgage payment for every $100,000 of your home loan. However, plenty of borrowers opt to put less than 20 percent down. You could also opt for a different type of loan with different terms. FHA loans offer borrowers loans with down payment requirements as low as 3.5 percent. VA and USDA loans require no down payment at all.
Am I Following the 28/36 Rule?
Lenders look at the numbers when considering whether you can afford a house. Some of those numbers reflect your housing costs and debts. As MillionAcres reports, a general rule of thumb is that your household should spend no more than 28 percent of its gross monthly income on housing and no more than 36 percent on all debt. If you aren’t comfortable doing the math yourself, there are a variety of online calculators that can help you.
Am I Looking Past the Purchase Price?
When you’re shopping for a home, it’s easy to get caught up in the hustle and bustle of negotiating the purchase price, but that’s really only the beginning. According to Business Insider, one sign that someone can afford a home is that they’re already thinking beyond the initial purchase. Yes, you’ll have to sign the paperwork and pay closing costs to seal the deal before you can collect the keys to your new home. However, the expenses of being a homeowner are only beginning when you become a homeowner. In addition to moving expenses and the inevitable costs associated with settling into a new place, you’ll also have utilities and homeowners insurance. Is there a homeowners association? If so, you might owe dues. If your budget is prepped for these changes, then you may be ready for homeownership.