Owning a home could be a lifetime dream come true. However, it's nearly impossible to save up enough to pay off a house from the start, so at what point are you ready to purchase a home?
Whenever the market is prime for buyers, it can be tempting to jump in and snap up a good deal on a starter home or the house of your dreams, but before you take out a home loan, ask yourself five questions to make sure you're really ready.
You don't have to have enough money to pay off your house in full - that's nearly impossible for most people - but first home buyers ought to start their journey to home ownership with a good portion of the cost paid before moving in. A good rule of thumb is to offer between five and 20 percent of the home's value as a down payment. Some mortgages require as little as 3.5 percent, but you will be in better shape for the long-term commitment of a mortgage if you put down at least five percent.
Don't forget that there are fees and closing costs involved in finalizing a mortgage.
Making your down payment shouldn't wipe out your savings. Before you buy a home, you should have several thousand dollars more in savings than you intend to spend on the down payment in case of unexpected expenses or income loss. Defaulting on a home loan could result in your new home being taken away.
You won't qualify for a mortgage unless you prove you have a steady income and have been working for more than a few months. You may also have to prove you're able to cover your living expenses by showing how much debt you currently have. Aside from the mortgage process, ask yourself if you're currently on a manageable budget. Could you still live comfortably with the higher monthly expense of a mortgage? Don't forget that homeownership will come with other expenses you didn't have as a renter, including insurance and maintenance costs.
Taking out a mortgage will result in long-term debt. Even if you have a steady income, you should minimize your debt before you take on a home loan. Some common loans you may have to pay down are school loans, car loans and credit card debt. Only once these loans are close to being paid off should you take out a home loan. Remember, if you lose your job or some emergency strikes and your income is reduced, you'll still have to pay down debt, so make sure it's as little as possible before adding a home loan.
Having a steady job isn't the only requirement to getting a loan. You must have demonstrated your ability and willingness to pay debts and credit cards in the past. Your credit score will play a role in your ability to qualify for a loan. Your mortgage broker will be able to check your credit score to see if you qualify for a mortgage.
If you want to check yourself, you can pay for a copy of your score or get a free credit report and guess at your score to see if there are any late payments listed. Veda Advantage and Dun & Bradstreet are two Australian agencies that provide credit reports free of charge; head to their websites for more details. If your report is generally favourable, you're likely going to qualify for a loan.
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