Do you think you are financially fit to buy a house this year? Homeownership is a dream for most Americans. However, not everyone can really afford to own their house.
Here’s the thing. Buying a house is one of the most expensive purchases that you will make. It costs hundreds of thousands. Most likely, you do not have that cash lying around. You will have to borrow money before you can buy a house. That means you have to apply for a very expensive loan. This mortgage is something that you have to pay off in the next 3 decades. Are you sure that you are up for the challenge?
More than anything, you have to be financially prepared to take on this huge transaction. Failing to pay back this loan can ruin your financial future. You do not want to subject your future self through the stress associated with the inability to pay off your loan. It is actually quite heartbreaking to live in a house for a couple of years – only to lose it because you cannot afford to pay off the mortgage anymore.
Before you buy a house, you have to make sure go through the necessary steps to prepare for it. According to Realtor.com, buyers have to move quickly if they want to secure their dream home. This year, the competition among buyers is quite high. If you find the house that is perfect for your lifestyle and will meet your requirements, you have to be prepared to buy it immediately. To do that, you have to be financially fit before you start looking for a house.
4 signs that you should not get a mortgage
There are certain signs that will tell you that you are not ready to take on a huge debt like a mortgage. If you have any of these signs, you need to think twice before you proceed with home buying. These can lead to your inability to pay back your loan. If the signs indicate that you are not yet ready, you have to re-evaluate your plans and take a moment to strengthen your finances before finalizing this decision.
Here are 4 signs that you have to be on the look-out for.
You have a low credit score.
Let us start with your credit report. Lenders will not only look at your ability to pay back the loan. Usually, your ability to pay off the mortgage can be determined by your salary. Now, lenders are more concerned about your behavior when it comes to debt payments. This can be gauged by your credit score. According to the data from FHA.com, you need at least 580 on your FICO score if you want to be qualified for a loan with the Federal Housing Administration. As part of the Department of Housing and Urban Development, the FHA provide insurance to qualified mortgage borrowers so they can avail of low-interest rates. If you have a bad credit score, you may not qualify for this. A bad credit score means you have a bad payment behavior. This will make you a high-risk borrower in the eyes of lenders. A low credit score is an indication that you do not pay your debts well. It is either you borrow too much, make late payments or you fail to pay off your loan entirely. If this is the one holding your back, postpone buying your home for now. While building your credit score is not an overnight thing, it can be done in a couple of months.
You do not have savings.
Another sign that you are not financially fit to buy a house is your lack of savings. This refers to two things – your down payment and your emergency fund. To get the best terms for your mortgage, you need to pay at least 20% of the selling price. There are two benefits if you have saved enough to pay the 20% down payment. The first benefit is a lower mortgage amount. After all, paying more in cash will lower the debt amount that you have to borrow. The second benefit is being exempt from paying the PMI or Private Mortgage Insurance. This is a requirement for those who cannot meet the 20% down payment.
When it comes to home buying, it is also very important that you have adequate savings in the form of an emergency fund. This emergency fund is one of the things that will ensure that you can continue paying your mortgage even if something happens to your income. If you do not have this savings, you may want to postpone buying a house so you can increase it.
Your income is unstable.
The third sign that you are not financial fit for home buying involves your income. A stable income is very important. If you plan on transferring to another company or shifting to your own business, you may want to postpone buying a house for the meantime. Make sure your income is stable before you borrow money. In case you do not plan on changing anything about your main source of income, you may want to strengthen your financial position by diversifying your cash flow. Make new investments or open another source of income. That way, if you find that your primary income is no longer enough, it will not jeopardize your mortgage payments. You still have another source to tap into.
Your budget does not have enough room for a new expense.
The fourth and final sign that you are not ready for buy a house is your budget. If your income can no longer accommodate another expense, then you need to re-evaluate your budget plan. You need to remove some of the expenses to make way for a new one. You can stop some of your subscriptions or you can lower the budget allocated for some of the spending categories. If you are currently renting, you can remove that from one of your expenses.
If any one of these signs is applicable to you, it is very important that you postpone your plans so you can improve your financial situation. It is important to be financially fit before you proceed with this very expensive expense.
Tips to improve your finances after buying a house
If you have made your finances fit enough to be able to buy a house, your efforts should not end there. You have to continue with your efforts after buying the house. There are so many financial tasks to complete so you can strengthen your financial situation even after becoming a homeowner.
Here are the things that you need to do.
Review the impact of the house on your finances.
Being a homeowner involves a lot of financial responsibilities. You need to think about property taxes and all the repair and maintenance costs. Since you own the house, you have the full responsibility when it comes to paying all of these off. Look at your financial situation to ensure that you can commit and afford all of these expenses.
Give your emergency fund a boost.
Since you have a mortgage, it is important to give your emergency fund a boost. That way, if something happens to your income, you can afford to continue paying. Not only that, any unexpected repairs or a busted heating system in the middle of winter will not stress you out. You have the money saved to finance that repair.
Think about home-related insurance.
It is also important for you to think about home-related insurance. According to Kiplinger.com, there are various ways that you can insure your house. You need a title insurance, flood insurance, and an umbrella liability insurance. If you want to be financially fit as a homeowner, you have to be prepared for certain instances that will jeopardize your house. For instance, a natural disaster like a tornado or flooding – this can damage your house. The insurance can help you pay for the expenses associated with it.
Update your estate will and trust.
Strengthening your finances also mean you have to think about the welfare of your family. Since this house is already something that is under your name, you need to update your estate will and trust. You have to indicate who your beneficiaries are. In case you are gone, you have to state who will own the property after you.
Have a back-up payment plan.
Finally, you have to come up with a back-up payment plan. Anything can happen and that includes losing your primary source of income. You need to make sure that your mortgage payments will continue to be covered. There are many ways you can do this. For one, you can diversify your income or you can dip into your retirement fund – at least until you find another source of income. Defaulting on your mortgage payments could make you lose your house. If you have exhausted all the other options, using your 401(k) to pay off your debt can be a reasonable course of action.
Being financially fit is something that you need to work on before and after buying a house. That is the only way that you can hold on to that house for as long as you want to live in it.