This is a collaborative post by Ellie Jo with home buying tips.
Homes are expensive. A combination of low-interest rates and restricted supply means that average property prices are going through the roof.
But even though sticker prices are high, many people can still get on the property ladder. And, often, they don’t even realize it.
Can you afford to buy a home? Here’s how to tell.
You Don’t Need To Dip Into Emergency Savings To Make The Down payment
Because of low-interest rates, down payments on most properties are still relatively low, even if the sticker price is high. Banks will typically accept 20 percent or less – which isn’t too bad, even if you’re considering a $200,000 home.
You can tell whether you’re ready to buy a home, depending on your savings. If you have to dip into your emergency fund to meet your deposit requirements, you’re probably over-stretching yourself. If, by contrast, you can meet funding requirements without dipping into your rainy-day fund, you could be ready to move.
You Can Make The Full Downpayment
Banks want borrowers to put down money on their homes to prevent negative equity – a situation where the property owner owes more than their home is worth.
Twenty percent of the average property value, though, is still a lot of money for the average person to hand over upfront. That’s $100,000 for a $500,000 house – a considerable sum.
If you can make the payment, however, it immediately puts you at an advantage. The reason for this is that you can usually avoid mortgage insurance – a product that protects lenders from borrowers with low deposits. Usually, this fee is around 0.3 percent, which can add up significantly over the life of the mortgage loan.
One way to make this work is by saving money through a direct negotiation for an FSBO home, listed under Flat Fee MLS. That way, you can avoid the buyers’ agent fees. In addition, because the seller knows there’s no real estate agent’s commission to be paid, they may be willing to lower the price.
You’re Spending Less Than 30 Percent Of Your Income On Housing
Historically, people spent between 20 and 30 percent of their monthly gross income on housing and accommodation, leaving the rest free for the other things that they wanted, like holidays. Today, though, the vast majority of people who buy or rent are actually paying more than this, cutting into their quality of life.
Take a look at your mortgage payments plus all the bills you’ll have to finance. If the total comes to less than 30 percent of you and your partner’s gross pay, you might be ready to buy a home.
If you wind up spending more than that, you could find yourself struggling to make ends meet.
You Can Afford The Home Loan
Home loans are cheap these days, but they’re not free. You’ll still have to pay a fee, even if you purchase a VA property.
Doing the maths to figure out how much you’ll have to pay is a notoriously tricky task, but you can now use online calculator tools that do it all for you. Take a look at the interest fees you’ll pay over the life of the mortgage and the headline repayment schedule figure. Ask yourself whether you can comfortably make monthly payments on your current income.
You Don’t Have Much Student Debt
Student debt is a millstone around the necks of many young people trying to get onto the property ladder. Interest rates on the debt are high, and it can never be forgiven. Once you have it, you’re stuck with it for life.
Before taking out a mortgage, carefully consider your student debt levels. People who are more than $100,000 in the hole should concentrate on repaying the money that they owe before taking on more obligations. If you’re a millennial, you might want to spend a few months at your parent’s home while working to make a dent in the total amount you owe.
Remember, there’s no limit to how much you can repay each month. So the quicker you clear the balance, the less money you’ll owe in the future.
Your Debt-To-Income Ratio Is Low
Your debt-to-income ratio is the amount of debt that you owe divided by your annual income.
If the number that comes out is higher than 43 percent, most banks won’t consider you for a mortgage loan. The reason for this is that they worry that you won’t be able to pay them back due to the money you owe other people.
Some lenders will offer you loans above the threshold, but you’ll wind up paying more in interest. And when you consider the size of the average mortgage, that could be a lot of money indeed.
So, are you ready to buy a property? Or will you have to wait for another couple of years to sort out your finances?
Rachel is an Austin blogger, educator, mom, wife, young breast cancer survivor writing about health, saving money, and living a happy life in Austin, Texas.
Rachel has written for HuffPost and Hometalk and has been featured on KXAN, Studio 512, Fox 7 Austin, and CBS Austin.