Liz Knueven, provided by
Published 2:38 pm EDT, Sunday, August 11, 2019
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- If you’re looking to buy a home, there are several signs you’re ready — you can make the full 20% down payment, you have a low debt-to-income ratio, and you know exactly how much a potential home could cost you each month, for starters.
- You’re also ready if you know you’ll still have an emergency fund, as well as money left over after your down payment for extra expenses.
- If you don’t yet have these things, you might not be ready to buy.
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If you’ve ever thought about buying a house, you likely already know how expensive it can be. And if that’s the case, you’ve probably come to realize how much work it can be to get ready to buy.
A few top questions to ask are the classics: Can you make the 20% down payment? Is your debt-to-income ratio low enough? And while answering “yes” to these questions might get you approved for the mortgage, there are a few other questions to ask to make sure you’re financially ready to make that house your home.
Here are seven factors to consider to make sure you can truly afford the home you want to buy.
Can you afford your dream home? Use this calculator to find out:
1. You’ve looked past the purchase price
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Know how much you’ll spend each month on utilities, and even things like trash removal? How about homeowner’s insurance?
These expenses will be on top of the amount you pay for your mortgage each month, so make sure you factor them into your budget.
Be sure to look for homeowner’s association fees as well. While not all neighborhoods have them, some do, and they could be costly. Realtor.com says that homeowner’s association fees typically run about $200 to $300 per month.
2. You’re not dipping into your emergency fund to make the down payment
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If you’re considering taking cash out of your emergency fund to make your down payment, you’re probably not yet ready to buy.
“When you decide you think you want to buy, you may be surprised to find out that it costs a lot of money to get into the place where you want to be. That may require you to put down all of your liquid assets into this house down payment and leave you what we like to call ‘house poor,'” she says.
She stresses that keeping an emergency fund can help avoid making rash money decisions in the future, and help ease stress in the event of job loss, injury, or other life events.
3. You can make the full 20% down payment
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A good indicator of home-buying readiness is whether or not you can make the full 20% down payment.
Putting down the full 20% can help you avoid having to pay for private mortgage insurance, an insurance policy generally added to the monthly mortgage payment (if you put down less than 20%) that protects a lender if a borrower stops paying on the loan.
Private mortgage insurance will cost somewhere between 0.3% and 1.2% of the balance on your loan, according to insurance broker Policygenius. For example, private mortgage insurance on a loan balance of $250,000 could add up to $3,000 extra to your total cost. But this isn’t necessary if you have the full 20% up front.
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