When to Consider a Home Loan
If you’re considering buying your first home but have had negative experiences with debt in the past, the prospect of taking out a home loan can seem daunting. Your frugal ideal may be to own your home outright, but sometimes saving—and renting—for that long isn’t sensible. Taking out a home loan is hardly as risky as accumulating credit card debt, though making your payments on time can help to improve your credit score. Here are a few situations in which you might want to consider a home loan.
Handling the responsibility
While you may not believe that living within your means requires saving up for the total purchase price of your home, you may be skeptical of putting only 3% down if your income source isn’t completely secure or if past debt problems haunt your credit report.
Only you can know when you’re truly ready to handle the responsibility of a loan that is often larger than what you make in a year. Still, ask yourself: am I secure in my job? Do I have enough money saved for a large down payment and an emergency fund? Why do I want a house now? Your answers can help you determine whether you’re ready to handle a home loan.
Judge your credit balance
It’s not only past credit abuse that can ding your credit score; never having credit at all can be just as detrimental. When considering a home loan, you need to know that your credit report is in order. Make sure any delinquencies are being addressed, that you make all of your payments on time, and that you’re not using more than 30% of your available credit. If you have significant student loans or other outstanding debts, you also want to know your debt-to-income ratio.
Your debt-to-income ratio, or DTI, is the percentage of your monthly gross income that goes toward paying off debts. This is the first thing that mortgage lenders consider when determining your mortgage eligibility. Generally, only 28% of your income should be going towards housing costs, and 36% of your income should be going towards paying off all of your debts. If your DTI is higher, you may not qualify for a home loan.
When you qualify for a special loan
If you are a member of a special or marginalized population, you may qualify for a loan with a lower interest rate or that requires a lower down payment, such as FHA loans. It is frequently recommended that potential home buyers save up a 20% down payment, but if this isn’t possible, different HUD loans require down payments as low as 1.5%
As for special populations, VA loans are available for veterans, and HUD 184 makes home ownership possible for Native Americans. Be sure to do your research and see what programs you qualify for that can make homeownership more affordable.
Remember, only you can know when you are ready to take on more debt. Even if you’re in a situation in which it is reasonable to consider taking out a home loan, the decision is as emotional as it is mathematical. Don’t be afraid to let your gut have the final say.
Measuring your income to cover your payments
Before considering a home loan, you want to make sure that you will have enough income to cover your payments. This also relates to your debt-to-income ratio. Your lender may use DTI to determine what kind of a payment they think you can handle, but you know your spending habits better than anyone else. Do some math and figure out your hypothetical mortgage payments. If it seems outrageous in the context of your budget, then you probably shouldn’t consider a home loan even if you could qualify for one.
This is also when making sure that your income stream is stable comes in handy. If you fear that you may not be able to comfortably cover your payments in the future, you should consider saving more money before considering a loan.
By Tim Richmond, content specialist with 1st Tribal
Image source: http://www.flickr.com/photos/safari_vacation/6354095089/
Category: Loans
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