How To Evaluate Your Readiness for Home Ownership

How To Evaluate Your Readiness for Home Ownership

Owning your own home has long been the American Dream, but is it right for you at this time? How do you know if you can really afford to own a house and all the costs that go with it? Real estate agents and mortgage lenders will often encourage you to buy and will show you on paper that you can afford the payments.

The question is: will you be able to afford anything else? Only you know your real financial situation and spending habits.

A bunch of numbers on a lender's schedule do not really indicate whether or not you can afford a house, because they say nothing about how you manage your money. Before you start looking at houses or talking to real estate agents, follow these steps to see if you're ready to buy a house.

Review Your Financial Condition

•  To see if you have too much debt, calculate your debt to income ratio. This is one of the first things a lender will want to know.
• Next, calculate your net worth. This will tell you if your assets exceed your liabilities.
• Review your current credit score by obtaining a recent copy of your credit report from each of the three credit bureaus. If there's anything on any of them that is not entirely favorable, try to resolve it if possible. If you've missed payments or been late making payments, and it's affected your credit score significantly, this may not be the time to apply for a mortgage.
• You may be able to find a lender that will lend you the money, but you're going to pay for it due to higher interest rates. In general, those with the best credit scores get the best interest rates. Over the life of your mortgage, even a small difference in interest rates can make a big difference in what you end up paying.

 Ask Yourself These Questions

• Is my income steady and reliable?
• Am I in control of my spending? Do I handle my finances responsibly, with minimal credit card debt? Do I have a written budget that shows me where my money goes?
• Do I have the money for closing costs, a substantial downpayment, and moving costs?
• Do I understand the costs of home ownership and do I have enough money left over after paying the mortgage, car payments, household bills, credit cards, student loans, and other expenses to cover the other costs associated with home ownership, such as insurance, maintenance, repairs, homeowners association dues, larger utility bills, lawn mowing services or a lawn mower, snow plowing services, etc.
• Do my spouse and I have enough life insurance to cover the mortgage and household expenses if one of us dies?

If you pass all of these tests, congratulations and good luck in your home purchase.

If you don't pass these tests, work on the trouble areas until you are completely comfortable that you can actually afford a house and all the other expenses in your life.

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