Purchasing a home is a pretty major life decision, especially for first-time homebuyers — and for a good reason! Buying a home is one of the biggest investments you’ll ever make. Between getting approved for a loan, home inspections, escrow, closing costs, and more, it’s also one of the most complicated things you will ever buy.
So, how do you determine whether or not you can afford to buy a home? Truthfully, there are many things to consider beyond your ability to pay a monthly mortgage or tallying how much you have in your savings account. To help you get started on your home buying journey, we’ve compiled a list of elements that factor into buying your first home. Scroll below to get the details!
Your overall financial health is going to be the main factor determining whether you’re ready to buy a home. In addition to indicating to lenders if you’re a safe bet for a mortgage, it’s also going to tell you how much home you can realistically afford. Your credit score, debt-to-income ratio, and savings contribute to whether or not a lender will approve you for a home loan.
Staying on top of your credit score is always important, but even more so when you’re thinking about purchasing a home. Your credit score is one of the key factors that impact your potential mortgage. Before approaching a mortgage lender, take some time to review your credit score and, if possible, fix any credit issues by paying off debt. It’s also beneficial to avoid opening any new lines of credit before applying for a mortgage.
Your debt-to-income ratio (DTI) also plays a significant role in whether you’ll be approved for a home loan. Every mortgage lender is different, but they all favor borrowers with a relatively low DTI ratio. That being said, the general guideline most lenders follow is a debt-to-income ratio of 43% or under.
When applying for a mortgage, lenders will often ask borrowers to submit bank statements from any accounts with “liquid” assets, such as a savings or checking account. These statements indicate that you have funds available for a down payment and closing costs and that you have a cash reserve should you need it to make your mortgage payment.
The Housing Market
Buying a home for the first time can be very stressful and, quite frankly, scary for many people. While it’s normal to feel nervous about purchasing a home, the housing market is set up to attract first-time homebuyers through various incentives such as specialized loan programs, tax credits, and down payment assistance. Both North Dakota and Minnesota offer special incentives for new home buyers. A qualified realtor or mortgage lender will help you determine what type of loan program is the right choice.
Although you may be qualified for a special loan program or incentive, there are two other important elements to consider when applying for a mortgage: interest rates and loan terms.
Keep a close eye on how the housing market and the economy are performing, as they both impact mortgage interest rates. Interest rates determine how much money you’ll spend over the length of the loan, and the lower the interest rate, the better. Opting to purchase while rates are low has the potential to save you thousands of dollars.
The standard repayment term on a mortgage is 30 years, but it’s worth considering shorter loan options. A 20-year mortgage shaves ten years off the standard loan term and can save a borrower a considerable amount of money on interest. However, it’s important to note that although you’ll pay less interest on a short-term mortgage, your monthly mortgage payment will increase.
While you may be excited to purchase your first home, it’s essential to evaluate your finances before you jump in. Having a clear picture of your financial health and the type of mortgage you may qualify for will simplify the process and make it less overwhelming. When you’re ready to take the leap into homeownership, Dabbert Custom Homes has a wide variety of affordable homes that are perfect for first-time homebuyers. Get in touch with our team to learn more!