How to know if you are financially ready to buy a new home
At some point, every homeowner most likely contemplates the idea of trading in their current home for one that might fit their needs or wants a little more. But before putting your current home up for sale, you’ll want to make sure your financial house is in order. Otherwise, one of the biggest purchases you’ll ever make could become the biggest mistake.
Here’s what you’ll need to consider:
How good is your credit, and what can you afford? One of the first steps to take is to meet with a lender to review your credit history and credit score, which could have changed since the last time you purchased a home. “This is also a great opportunity to determine your buying power,” says AJ Harma, Vice President of Mortgage Lending at Independent Bank. Your house payment should be limited to about 30 percent of your pre-tax income.
Is your job secure? Jeff Clatterbaugh, Vice President of Mortgage Lending at Independent Bank, explains that banks look at a two-year work history when providing home financing. "A salaried job is favorable because it's stable,” says Clatterbaugh. So before making any big decisions, make sure that you aren't thinking about making any changes at work first.
What about other expenses? Clatterbaugh also warns not to stretch on a purchase price, and Harma points out that the house payment plus other monthly debts should generally not exceed about 40 percent of pre-tax income. That leaves 10 percent for other debt payments. Other expenses to consider would include home repairs, energy costs, and maintenance fees if you’re buying a condo.
Location, location, location. Harma identifies this as the single most important factor. “School districts can be important considerations for resale and/or future family needs. Proximity to shopping and employment can also be important considerations.”
Equal Housing Lender