Just because the bank will let you buy more does not mean you should. Be a well informed home buyer by taking the following tips into consideration when making the big ticket decision…
Banks are for profit. They make money by making loans and it is up to you the consumer to decide when, how and if it justifiably makes financial sense for you.
If you have the financial acumen to buy a home; manageable debts, good credit, a down payment and capacity to handle a payment, generally you are in good financial shape.
Here’s the reality-the big fancy house you may qualify for may not be in your best interests. If your ability to save or plan for the future or future positive financial decision are comprised as result of a bigger, better, nicer home, it is probably unwise to purse buying that home.
The goal would be to afford a home while still continuing to make positive financial progress. If a home purchase limits you financially, buy a lower priced home or save while concentrating on earning more.
Things to take into the mix:
Job stability – are you comfortable with your job? If your job projection is looking strong this creates stability which can support a mortgage payment long into the future.
Payment to income -how much of your income goes towards the mortgage payment and other monthly obligations? Lenders will let you take on a mortgage payment with your other obligations plus housing payment at no more than 45% of your gross monthly income. Is your number at this mark? Is it over or under? This is a key indicator of true affordability. Ideally, you want your debts to not be more than 36% or lower of your monthly income. Every scenario however is different. You also might want to take into consideration if your income will be rising as this impacts affordability.
Saving– The last thing you want is to have a house so expensive you don’t have enough money left over for monthly savings, retirement, or kid’s education. You need to be able to still save enough money to plan for those things as well as the unexpected curve balls life will inevitably throw at you. A good rule of thumb is to have a float account.
Your float account is your survival number multiplied by three, representing three months.
Take all of your monthly payments on everything; mortgage, all housing expenses, and all bills and them together then multiply this by three. If this number is say $10,000 per month, you would need $30,000 as your float account.
While this might sound daunting, this is to float yourself if you ever have a job loss, income loss, or an unforeseen financial problem. This way you’re not buried when something happens resorting credit to make ends meet, only to enrich the bank in the process. This does not mean do not buy a house until you have a float account, it just means that if you are going to buy a home make sure that you’re still working towards building your flow account and continuing to save.
Credit– Generally, for a favorable interest rate on a conventional mortgage loan you’ll need to have a credit score of at least 620 or better. The idea is that you want your credit score as best as you could possibly get it for you. If the best you can get your credit score is 680, then ok. Don’t get wrapped too much around the axle by having credit score goals are far unattainable. Consider this example if your credit score is 620, but you want score to be 740 before you buy a home, you’re going to be waiting a long time and you should pay more attention to the other factors here discussed in this article if the rest of your finances are in alignment.
Buying a house is a decision that should be carefully planned, by making smart well-informed decisions. An experience mortgage lender committed to the long term relationship can provide this financial guidance to help you achieve your goals.
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