Are you thinking about buying a house soon? Buying a house is a huge step in life for most people. And it’s not something you can afford to do incorrectly. Once you buy a house, you’re stuck with it for a lengthy period of time, even if you’re just flipping. My parents have owned their house for a good 34 years since they’ve been in America. Buying a house not only changes where you live but also your monthly disposable income significantly. Because of these reasons, I’ll provide you with some steps to buying a new house.
Buying a House
Before you even consider going to step 1, make sure you always have your emergency fund. This emergency fund should be separate money from your down payment fund. In fact, you may want to keep separate accounts for your emergency fund and another account for “saving for my house” fund. That way you won’t be tempted to spend it. Some banks allow you to open multiple savings accounts so you can open one up just for buying a house.
Steps to Buying a New House #1: Check Your Credit
First thing to do before even thinking about buying a house, you should know your credit score. This determines how much you will qualify for and the % interest you’ll be paying for the next 30 years. The difference between 0.01% interest on your $500,000 mortgage would be thousands of dollars over the course of your mortgage. Use the mortgage calculator from BankRate to determine how much you might be paying and at what interest rate.
I personally use CreditKarma since they’re free. Credit agencies by law are supposed to give you one free credit check periodically so you can also be sure to use that.
Steps to Buying a New House #2: The 28% Rule
Now that you have an idea of where you stand on your mortgage payments, use that to determine whether or not you adhere to the 28% rule.
This rule is used when calculating your monthly payments on your house and it states that the net total payments on the house per month should not exceed 28% of your gross income.
So let’s say you make $5,000 per month before taxes (before taxes because it’s gross income). The recommended amount you should be paying on your mortgage should not exceed $1,400.
Also, if you’re starting from scratch, then you should aim for a house that costs no more than 3x your gross salary. If you’re making $100,000 per year, then aim for a house valued around $300,000.
If you’re married, then combine the salaries of both couples and determine your house value from there.
Steps to Buying a New House #3: Debt-to-Income Ratio
Also known as the 36% Rule, this rule is a guideline stating that your total monthly payments for all debt including mortgage should not exceed 36% of your gross income. Before getting a loan, think about where you stand and check to see if your Debt-To-Income (DTI) ratio is less than 36%.
To calculate this add up all of your monthly debt (credit card bills, phone bills, car loans, school loans) and divide that by your monthly salary. Then multiply that by 100 to get your DTI percentage. Some lenders will actually take a look at this when evaluating you for a loan and set a strict limit of a 36% DTI.
Example: if your monthly debt from phone, rent, and car loans is about $1,500 and you make $5000, your DTI is (1500/5000) x 100 = 30% which is under 36% so you’re standing in a good position to go!
Steps to Buying a New House #4: Are You In Good Financial Health?
Last thing to check before buying a house is to see if you’re in good financial health.
- Do you have a consistent source of income? This may be trouble for freelance workers who aren’t sure of where their next paycheck is coming from or if they can’t find a gig.
- Do you have 6 months worth of expenses in a liquid account for emergency? Don’t forget about your rainy day fund. If you just bought a house and then get laid off unexpectedly, make sure you have at least 6 months worth of expenses ready. It may do you well to pretend as if you already have the mortgage and build an emergency fund based off that.
- What’s your Down Payment? Aim for 20%. This guarantees you won’t have to buy mortgage insurance when buying a new house. What is mortgage insurance? It’s insurance telling the lenders that you will pay your mortgage. Yes it’s probably one of the stupidest things I can think of that you have to pay for. You’re paying someone to tell them “Yes I will pay my mortgage.” Avoid this if you can. If this means you have to save up an extra 6 months, then so be it. It will reduce your monthly costs and draw you nearer towards your 28%/36% goals.
- Do you have other loans to pay off ? Remember to pay off your accounts based off the highest interest rate first unless you can knock some low hanging fruit out of the park. Buying a house will mean another account to pay for. If you have a student loan in six figures, you should aim to reduce that by a little bit before buying a house. Additionally, make sure the monthly student loan amount doesn’t constrict you too much from your cash.
Once you’ve checked off all the steps to buying a new house. I personally have been looking for property in the area so I’ve been going through this checklist more and more. Specifically, I’ve been trying to boost my credit score a few more points (trying to get over 800) so I can earn a great interest rate on my mortgage.