Whether you’re starting a family or simply want to escape life in an apartment complex, buying a home could be the logical next step. You have a steady income, and you’ve worked hard to accumulate savings. But how do you know when you’re ready to make the commitment to purchase a home?
It’s our goal to make you a successful homeowner with an affordable loan. Think “starter home.” Burdening yourself with a large monthly mortgage payment can put a great strain on your budget and lifestyle. We included a list of things to consider before making the leap.
First, ask yourself the following questions:
● Can I depend on a steady and reliable income?
● Is my job and life stable?
● Do I want to make a commitment to this geographic location?
● Am I in control of my spending? Do I handle finances responsibly and have a written budget for my monthly expenses?
If those questions can be answered with a “yes,” then you should look into whether you can qualify for a mortgage. Here’s how:
● Calculate your debt-to-income ratio. Lenders want to know that you will be able to keep up with your current monthly debt obligations, your new mortgage and home ownership costs and still have cash left over each month. You should take expenses such as car payments, household bills, credit cards and student loans into consideration.
This ratio can be calculated by adding up all of your monthly payments (including minimum credit card payments) and dividing it by your gross monthly income (income before taxes and other withholdings). A ratio greater than 45 percent indicates a high debt burden.
Lenders will also look at your front-end ratio, or your monthly housing expense (principal and interest, taxes and insurance) as a percentage of your gross monthly income. Housing expenses shouldn’t be greater than 30 to 35 percent of your monthly income.
● Build liquidity. Some experts recommend having a emergency fund with six months’ worth of income.
● Separate from your emergency fund, you’ll want to have money for the down payment. It’s not a good idea to empty your bank account to close on a new home. You’ll still need to cover moving expenses, insurance, maintenance, repairs, homeowners association dues, larger utility bills and other incidentals such as lawn care.
A higher down payment will reduce the amount of money you need to borrow and can increase your chances of getting approved.
● What do you currently pay in rent? How much would you be comfortable spending for a monthly mortgage payment? The Washington Federal mortgage calculator can help you determine how much to expect for your payments.
It’s important to consider the four “Cs” of home financing: Cash (savings/down payment), Credit (your credit score and history), Collateral (the home itself, since it will secure the loan), and Capacity (your income). Washington Federal adds a fifth “C” — Character. We look for responsible borrowers who will be responsible homeowners.
Your home is more than a place to live. It’s where you’ll make memories with your family and friends. While buying a home may be one of the biggest financial decisions you’ll ever make, you can feel confident making it with Washington Federal — a trusted lender since 1917.