As the spring season begins, both the flowers and the real estate market tend to bloom. The spring is a popular time for real estate transactions due to the rise in buyer and seller activities.
As the weather gets warmer and the days get longer, many people feel the urge to settle down before the summer and school season begins. Amidst the excitement of house hunting, it’s important to remember to approach the home-buying process with your financial well-being in mind.
Here are four financial considerations to help guide you through the journey of purchasing a new house this spring:
Affordability Assessment:
Before you start browsing listings or making offers, conduct a self-assessment of your financial situation to help you determine a reasonable price range.
Mortgage lenders typically prefer to see a total debt-to-income ratio lower than 36%, which includes existing debts beyond the mortgage amount. Further, they prefer no more than 28-31% going towards a mortgage specifically.
While you may be able to qualify for the loan and afford the monthly payments, it’s essential to weigh the investment’s long-term implications as well. Make sure you can comfortably manage the new home expenses while still meeting your savings goals.
Setting a realistic budget can help you narrow your search and avoid overspending.
Down Payment:
Saving for a down payment is a crucial step in the home-buying process. A larger down payment can reduce the overall loan amount and lead to better interest rates.
Aiming for a 20% down payment is often suggested, but there are also various loan programs that allow for lower percentages. Although a lower down payment may seem tempting, note that any amount below 20% ca bring an additional cost in the form of Private Mortgage Insurance (PMI).
PMI can range between 0.5% and 1% of the total loan amount, depending on the state and lender. These payments do not go towards your mortgage’s principal or interest. If you continue to make your payments, the PMI can eventually be taken off. However, initially prioritizing a higher down payment can help mitigate these extra expenses.
Credit Health:
Maintaining a healthy credit score is essential to qualifying for favorable mortgage rates.
If you are in the market for a home, avoid taking on new debt, such as opening credit cards or buying a new car. Anything that you have to open a credit account for can negatively affect your credit score.
Regularly monitor your credit report from one of the major credit bureaus and address any inaccuracies promptly. Additionally, in the months before purchasing a home, work on improving your credit score by paying your bills on time and reducing outstanding debts.
A strong credit profile enhances your eligibility for competitive mortgage terms.
Emergency Fund and Future Expenses:
Prioritize building a strong emergency fund before diving into homeownership.
Owning a home comes with many unexpected costs, such as repairs and maintenance. Having a financial cushion can prevent these expenses from causing financial strain.
Additionally, factor in ongoing expenses beyond the mortgage payment. Consider costs such as property taxes, homeowners’ insurance, and potential homeowners association (HOA) fees in your budget. Being prepared for these expenses can help you gain peace of mind financially as you transition into homeownership.
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Cory Reamer,
is an Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Cory graduated as a student-athlete with a degree in Finance from The University of Alabama and is passionate about helping others on their financial journey. For more information, visit The Welch Group. Consult your financial advisor before acting on comments in this article.
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