One of the biggest investments many people make is buying their first home. However, a home loan is a very serious financial commitment. To help, below are five ways to know if you are ready for a home loan.
- You Have Steady, Reliable Income
Lenders require proof of income when you apply for a mortgage. This includes documents like W-2 forms from the last two years, several pay stubs, recent tax returns and evidence of any other forms of income you claim to have. If you haven’t had a rather steady job over the past two years, you will likely not be approved.
- You Have Healthy Credit
If your credit is poor, you will have a hard time getting a home loan. Knowing this, you should try to improve your credit before attempting to get a mortgage. The first step is to make sure to learn exactly what your credit scores from each bureau are. If you can, take steps to raise it before you buy a home.
- You Are Able to Handle the Costs and Risks of Being a Homeowner
There are many expenses that a homeowner must pay for, in addition to the mortgage payments. This includes property taxes, home insurance, utilities, real estate fees, and home maintenance expenses. These can quickly add up! You also need to make sure you can pay for them, even if you find yourself temporarily unemployed. It is extremely important to have enough money in a savings account to cover three to six months of home expenses before you decide to buy a home.
- You Have the Proper Debt to Income Ratio
Simply having decent income may not be enough to obtain a home loan. The lender will also be looking at the amount of debt you have. If you have too much, a lender may assume that you probably won’t have enough money to make your mortgage payments on time in addition to paying on your other debt. In most cases, you should have a debt to income ratio of only 33%. If it’s higher than this, try to go ahead and pay off some of that debt before applying for a mortgage.
- Alternatives Are Not Better Choices for the Long Term
For many people, especially young people, owning a home is not the best option. For example, if you expect to move anytime during the next several years, making a large investment in real estate is risky. Although you can always sell your property if you move, that can place you at the mercy of the ever changing housing market. You could even be pushed to sell the property for less than it is worth.
Overall, there are many factors that go into obtaining a home loan, but the home loan is not the end of the journey. After you are given the loan, then you're a homeowner, a whole new level of responsibility.
