If you are looking to buy a home within the next year or two, it’s important to check on your home buying HEALTH. How do you know you are in a strong place to buy a home? You can look at certain factors related to your current housing and financial situation to prepare for what’s to come for you and your family.
What is your home buying HEALTH?
I encourage you to evaluate these four areas; Home Equity, Assets, Liabilities, and Target Home. By looking at these factors together, you may decide it’s time to buy, or you need to wait. Let’s get started!
If you already own a home, it is important not just to know what you think you could sell the home for, but how much you still owe on your mortgage. The sale price of your home minus your balance due on the mortgage is roughly the amount of equity you have in your home. Potential sale prices can fluctuate, so knowing which way the market is heading and whether you have increased your balance due by taking a cash-out refinance, HELOC, or second mortgage is vitally important to have a clear picture of how much equity you bring to a potential new home purchase.
Your home equity also impacts whether you meet the 80% loan to home value threshold to avoid mortgage insurance on your new home. This can impact your purchasing power, so be clear based on the other following factors whether you will have at least 20% of cash for a down payment on the next purchase.
We all know we should have a strong savings account for hard times, but lenders want to see those assets in many home buying situations as well. In some transactions, banks will want to see that you have sufficient reserves to cover up to 12 or even 24 months of mortgage payments. These situations aren’t very common, but knowing what type of loan you will be applying for based on the terms, the use of the property, and your particular income situation will help you know what kind of assets a lender will want to see.
The good news is that many investment accounts can qualify as these types of assets. So, apart from saving money for a down payment, be sure to continue good retirement planning and investing to put you in a healthier place for any future home purchases.
‘Liabilities’ is a fancy word for debt and other payment obligations. We tend to simplify how we think about debt until we need to total those up and analyze a debt-to-income ratio or DTI. This magic number impacts what loans you qualify for and what kind of interest rates you will pay. While you might feel fine about maintaining your current debt payments for cars, credit cards, or school, you’ll want to pay many of those items down before applying for a home loan to put you in the strongest position. You may need to chose whether that dream car is going to stick around or maybe driving something more economical and paid-off is helpful for a season to improve your options when buying a home.
Debt is also a major factor in your credit score which, in turn, impacts your interest rates. Running a free credit report will often provide you with some insights into ways to clean up your report and improve your credit score.
Shopping for a home can be exciting, emotional, and also exhausting. When you are preparing to shop for a new home, it is important to set some parameters and boundaries before your shop. A ‘wish list’ will always leave you wanting more, but a list of must-haves and non-negotiable factors will help you narrow your search.
By completing the above assessments, you should now have a better idea of how much house you can afford. Be sure to use a simple online mortgage calculator with a reasonably accurate rate to figure out what a monthly mortgage payment might look like and use this to limit your home searches. If your desired home and your current home buying health don’t match up, it is likely a good to wait until you are in a stronger position to buy.
Need help understanding any of these items?
A mortgage professional will help you take all of these things into account and see the big picture. Before you start shopping, give me a call at 206-407-9474 or email and I’d be happy to help you understand how your home buying HEALTH positions you for your next dream home.