Hi Taylor: My husband wants to buy a house and get out of our rental. I want to do the same but have a lot more questions about how much it’s really going to cost. How do we figure out if we can afford to buy a house? — Carol
Hey Carol: Buying a new home requires a big mental shift for a lot of people. You have to understand that the huge tab that comes with ownership replaces the rent you’re paying now, that it eventually leaves you with something of value, and that there are tons of extra fees that pop up during the process.
Start by looking at your monthly expenses — what you pay now and how much you can afford to add onto that. If your current rent is $2,000 and you struggle to put anything into savings once all your bills are paid, taking on a mortgage could be tricky. You’ll need to get a monthly payment below $2,000 so you have something left for the taxes, insurance and maintenance costs.
Once you determine a monthly amount that makes sense, you need to figure out what you can afford as a down payment. Different lenders will allow for different amounts; some require 20% payment up front while others let you start with as little as 3% of the total cost. Don’t be overly enticed by the lower down payment, as that ends up costing you a lot more down the road. The more you can pay at the outset, the better the terms of your loan and the more you’ll save in the long run.
Your required minimum down payment hinges largely on your credit score, so that’s something you’ll need to assess before you really get into the process. Poorer credit means you need to have more cash on hand, so taking a year to improve your score while saving up a little capital can make a huge difference.
As you look at what you have in the bank and what you can afford to spend, you might surprise yourself. It might turn out you’re closer to buying than you had expected. With a little bit of savings and a good mortgage provider, lots of people end up getting nice homes more quickly than they expected. However, if you assume the process will be as easy as signing for a loan and then getting a set of keys, you’re in for a rude awakening.
Landing a good mortgage can be a real process, so I’ve posted a five-step guide at GoFarWithKovar.com. That article will give you a little more insight as well as some information about potential lenders. Hope it all works out, Carol.