Buying Your First Home: Are You Financially Ready

Unless you are one of those lucky ones who inherited a house from parents, in-laws, or close relatives, you might always be thinking about buying your dream house. If you are already thinking about buying your own house, you might also be contemplating various factors involved in buying your house, such as your savings, your financial position to pay a mortgage, etc. When you want to buy a house, you will have to consider a lot of things such as the price, design, location, etc. but the most important thing is the money you have and the money you are already generating.

Since you have clicked the title and you are reading this article, we assume that you don’t yet have your own house and the question that is popping in your mind is “What are the factors that determine whether I am financially sound to buy my first home.”

Before we answer your questions, here are some interesting factors related to homeownership.

  • According to the data released by statista, the percentage of people who own a house in the US stands around 65.1 percent. This figure is for 2019.
  • According to Trading Economics, the country with the highest homeownership is Romania with 96.4 percent, followed by Slovakia 91.3, and Singapore 91 percent. These figures are from 2018. Likewise according to the 2018 figure percentage of people who own a house in the UK is 65.2 and 66.3 in Canada. The figure for Australia is 65 and this data is from 2016.
  • According to Bloomberg, the median age for first-time homebuyers in the US is 33 years whereas for all buyers it is 47 years.
  • According to data released by CNBC, 1 in 3 millennials or generation Y (people born between 1981-1996) own a house in the US.

What does being financially ready means

You want to buy a house, but do you have enough money to pay for the house? Do you have an income source that can pay the mortgage? What does your financial position say about you? By the way, what does being financially ready mean? Financially ready means you have enough money to buy a house or a strong income stream so that you will be able to pay back your mortgage.

You might be dreaming of buying your own house, right? Well, what of it? Everyone dreams to owe his/her own house. When you look at people, your friends, colleagues, or relatives buying houses, this makes you anxious and you become eager to buy your own house. But suddenly a driving force drives you back and cools down your excitement. Yes, of course, it is the driving force in everybody’s life. What’s that? Obviously, it’s “money”, suddenly you start thinking whether you can afford to buy a house or not and these thoughts carry away your anxiousness. So to get out of the problem that when you should consult your real estate agent about your dream house, this is easy to go checklist is a good option to start with.

How much money should I already have when I want to buy a house?

How much should my income be in order to buy my dream house?

How much money I can pay as a down payment and how much do I need for an easy monthly installment?

Down payment and savings

If you are planning to buy a house without any loan, the first and foremost thing is to determine whether you have enough savings to buy the house you want or not. If you want to finance your house through a bank loan, keep one thing in mind that banks and financial institutions do not provide the entire amount of the loan. Well, this also depends according to the bank as some banks claim to finance 100 percent, however, for most of the banks the loan never exceeds 90 percent of the value of the house, and you will need about 10 percent of the value as savings to make a down payment.

Let say you have managed to save some money which you are using as a down payment for your dream house, or let say your bank has agreed to finance your dream house fully, now you want to know how much money do you need for easy monthly installment or mortgage repayment.

Loan repayment

Your repayment rate is directly linked with your loan term. For example, the repayment amount for a 10-year loan term is different from a 15 or 20-year loan term. The rule of thumb is shorter your loan term higher is your repayment rate and the longer your loan term, the smaller is your repayment amount. However, you end up paying more money as interest when your term is longer. Another important factor to consider is the ratio between your income and your repayment. Actually, the total amount your bank is going to finance on your home is depended on your monthly income. Experts suggest that your monthly repayment rate should be at least 28 percent of your monthly income and never exceed 36 percent monthly income.

Let say your home loan is $300,000. If your interest rate is around 4 percent and your loan term is 15 years, you will have to pay about $2200 per month. However, for a 30-year loan term, your repayment amount is cut by half. As mentioned above, your repayment amount should be between 28-36 percent of your monthly income, in other words, your repayment amount of $2200 should be 28-36 percent of your income.

Tax benefits

A house purchased with a loan also has some tax benefits which try to lessen the burden. How much tax benefits you get depends on your country’s taxation laws. There are some rules that are needed to be followed by you as a borrower to enjoy these deductions, however, you should always calculate your tax benefits and consider the tax benefits conditions while making a decision to buy a house.

Employment condition

If your main income source is a job that gets you a fixed salary, make sure that you have a good job and you are not jobless anytime soon. This condition is a must if you are financing your house from a bank loan. If the home loan has a long tenure say 20-25 years, ensure that you do not retire before you finish the repayment. In all cases, you should look to repay your loan before its tenure gets over. You also need to think about extra expenses. For example, during the holiday seasons, you might be spending more and you might fall short of your mortgage repayment. For situations like these, you also need some savings.

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