Are You Ready for a Mortgage?

If you considering buying a home for the first time, there are a lot of things to consider before you make the plunge. Buying a home is usually the biggest investment you will make, and you owe it to yourself to find out about and evaluate all of the opportunities and risks you will be taking on if you decide to do it.

Are you better off renting? Like anything, there are advantages and disadvantages to buying a home. On one hand, when you buy a home, you are eligible for a tax break on your income tax, but on the other hand, you will have to pay property taxes, and sometimes homeowners or condo association dues. When you purchase a home, you will be building equity, and if you keep it for a long time, eventually, you will pay off your mortgage. But when you rent, you do not need to manage many repairs and maintenance issues and costs, and some utilities may be included in your rent payment that you would have to pay separately if you buy a home. If you are considering buying a home now for the first time, you may be able to get a low price because of the collapse of the real estate market. But you will have to make sure you have a substantial down payment (usually 20% of the purchase price and sometimes more) and you will may not be able to qualify for a low interest rate because of the credit crunch. Run the numbers to get an idea of what makes sense given your current financial situation and goals.

How is your credit? Now, more than ever, your credit history is extremely important, as lenders clamp down on any loans they view as risky. Even consumers with good credit can find themselves being rejected or offered a lower rate than they might have gotten just six months ago. Get a copy of your credit reports and FICO score. If there are any items that are questionable, you may want to talk to a reputable credit repair firm to help you clean up your credit so you can qualify for a better interest rate. Your other options are to dispute the derogatory credit marks yourself or just wait it out until you have a chance to improve your credit history.

How much can you borrow? There are two things to consider here: how much you can borrow and how much you should borrow. The first question can be answered using your debt-to-income ratio. Take your proposed mortgage monthly payment, add any car payments, credit card payments, student loan payments and any other payments you have on debt. If this number is more than 36% of your gross monthly income, lenders will be reluctant to give you a mortgage for that amount and you will need to look at a smaller mortgage payment, on a less expensive home. The second question is a matter of personal preference. Ask yourself how much debt you are comfortable with.

How much are you willing to stretch for your dream home? What is your short-term and medium-range financial outlook? If you have been told that you are being groomed for a higher paying job, maybe it makes sense to go for it. On the other hand, if you are in a company or an industry that has been or is planning to cut back, now might not be the time to think big.

How much will you save in taxes? Even if your mortgage payment is more than you have been paying in rent, it may be worth it because of the tax break you get on your personal income tax. Speak to a tax professional to determine your savings. Be sure to factor in the property tax you would now have to pay every year, to get an accurate picture.

Once you have done this exercise, you should have a pretty good idea if this is a good time for you to buy a home, and about what price range you should be looking in. Good luck