Ah, the American dream. You just got hitched, and now you want to complete the picture by buying a home. If you don’t budget beforehand and really understand what you are getting yourself into, your dream can turn into a foreclosure nightmare. The fact that you’re already budgeting for your mortgage means that you are on the right track.
Staying in Your Home
You need to look at the entire picture when contemplating purchasing a home. Many people only determine if they can get into a home and forget the part about being able to stay in the home, which is just as important. Mortgages are like a new job or a new boyfriend: getting one can be easy, but maintaining one takes some work.
A new home entails expenses that you don’t have as a renter. Besides the initial costs of the down payment, closing costs, moving fees and possible utility start-up fees, you have your regular monthly payment, monthly utilities, homeowners insurance and property taxes. Also consider preventive maintenance, repairs, furnishings for the house, appliances and possibly, home improvements. A good rule of thumb is to expect to pay 3 to 5 percent of the house’s value for maintenance, furnishings and repairs, according to the North Carolina Cooperative Extension Service. The Realty Times figures you can spend hundreds or, depending on the size of the property, thousands of dollars a month on lawn upkeep, paint, roofing, gutters, driveway repair, power washing, deck cleaning and pest and termite service.
Before you shop for a mortgage loan, make your budget. On it, list your current income, savings, other assets and expenses. Expenses include daily living expenses (minus current housing) plus any debt you may have. If you do have outstanding debt, figure when you will have it paid off. What should really impress a lender, however, is showing that you are aware of all of the costs of home ownership and that you have included those in your budget. In other words, budget for your mortgage expenses, not for your current housing.
If you can put down 20 percent, you should, because if your down payment is less than that, you have to pay private mortgage insurance. When it comes to a safe amount to spend on your monthly payment, a good number to shoot for is no more than 28 percent of your income. If you are not ready, spend some time to pay down your debt and increase your savings prior to applying for a mortgage. If you think that you will have a larger income the next year, you can include that information in your budget, but only if you are confident that your income will increase. For example, if you know that you will get a raise or promotion after you get a required certification or degree, you can probably budget for the higher salary. Also, consider how stable your income will be in the future, meaning how easy it will be for you to find another job if you lose your current job. If unemployment is bad, interest rates could rise, making getting a mortgage unaffordable.
Your Credit Report
Besides looking at your budget, the lender pulls a copy of your credit report to determine whether you are a good risk. You should be prepared and request a copy of your credit report from TransUnion, Experian and Equifax. You can get a free copy from all three agencies once every 12 months by contacting AnnualCreditReport.com., but you have to pay extra to find out your score. FICO scores range from 300 to 850. If your score is 760 to 850, you should get the lowest rates, according to Bankrate.com. If your score is below 620, you are probably in the subprime category. Typically, you need a score no lower than 500 to 520 to qualify for a mortgage. Credit reports often contain mistakes, making your score appear lower than what it should be. That’s why you need to request your report several months before you intend on applying for a mortgage. If you find a mistake, you need time to notify the agency and request the agency remove the mistake. Once that is taken care of and you have determined that you can afford a home based on your budget calculations, you can safely apply for your mortgage.
- North Carolina Cooperative Extension Service: Budgeting for Home Ownership
- RealtyTimes: Budgeting For Household Expenses Means More Than Mortgage Payment
- MSN Money: Why You Need a Home Down Payment
- CNN Money: Mortgage Applications at Lowest Since November
- Bankrate.com: How Credit Scores Affect Mortgage Rates
- new home image by hans slegers from Fotolia.com