There are probably many of you who have been reading the 2009 tax credit for home buyers series I’ve been writing on Thursdays (if you haven’t seen these helpful blogs, please visit here), and are now wondering “Can I afford to buy a new home?”
Let’s take a look at a few things to see…
Down Payment:
In order to receive the best rate on your mortgage and terms you should have a 20% down payment. Although this may seem like quite a lot to come up with, if you’re able to put this much down, you will protect yourself from a drop in property values, as well as avoid paying for private mortgage insurance (PMI).
Mortgage, Property Taxes, and Insurance:
Lenders will assess your debt-to-income ratio to make sure you aren’t overextending yourself with a mortgage payment you can’t afford. You should keep your payment to no more than 28 percent of your pre-tax income in order to ensure you have enough money left over each month for your other expenses.
Employment Status:
If you’ve started a new job in the last 24 months or so, it may not be the best time to consider purchasing a home as lenders prefer at least two years of employment stability. If you are self-employed or a contract employee who works on a commission basis, you should find ways in which to document your income in order to prove to lenders you can afford to purchase the home you desire.
Other Debts:
If you are carrying a lot of debt, lenders can be reluctant to offer you a mortgage loan. Generally, you should have no more than 36 percent of your pre-tax income going toward paying off your debts.
Credit Score:
Your home’s mortgage loan interest rate will be closely tied to your credit score; the lower your score, the more difficulty you will have obtaining a loan at a reasonable interest rate.
So, in summary, if you have a 20 percent down payment, have worked for two years or more for the same company, carry minimal other debt, have a good credit score, and your payment will not be over 28 percent of your pre-tax income, you are likely in a good position to take on a loan for a home at this time. If not, it may be in your best interest to wait until your situation improves a bit.
