The factors you should consider before buying a new home


Whenever you think you’re ready to purchase a property, the first thing you’ll probably ask is, What can I afford? To answer the question, you must consider a lot of variables. So before you jump at what appears to be a fantastic deal on a property, learn how to define financial capability. You’ll need to think about everything from the debt-to-income (DTI) ratio to mortgage rates.

While considering the challenge of making that primary choice to acquire a new house, there are a few essential methods you should drive your evaluation. When it comes to securing a mortgage, determining your debt-to-income ratio (DTI)—specifically, the front-end DTI—is crucial. Aside from the property’s price, several additional financial and lifestyle factors are to consider when determining if you are able to pay to buy a home. You should also consider the local real estate market, the economy, and the ramifications of staying put for an extended period. You’ll also have to think about your current and future lifestyle requirements.

Money is perhaps the most apparent consideration. If you have the financial resources to buy a property outright, you can buy one now. Even if you can’t pay cash, most experts think that you can afford it if you can pass for a mortgage on a new house. But how much can you afford in terms of a mortgage? The Federal Housing Administration (FHA) usually uses a debt-to-income (DTI) ratio of 43 percent as a guideline for issuing mortgages. 1 This ratio is used to assess if a borrower will be able to repay their monthly payments. However, depending on the real estate market and overall economic situations, some lenders may be more liberal or stricter.

A DTI of 43 percent indicates that all regular debt payments, plus housing-related expenditures such as a mortgage, mortgage insurance, homeowners’ association fees, property tax, homeowners insurance, and so on, should not go above 43 percent of your monthly gross income. A 43% DTI means that all standard loan repayments, plus housing-related expenses like mortgage, mortgage insurance, homeowners’ association charges, property tax, homeowners insurance, etc., must not surpass 43% of your total household income of a month.

One should also examine the front-end debt-to-income ratio, which compares your earnings to the monthly debt you would acquire if you only paid for housing expenditures, such as mortgage payments and mortgage insurance. Typically, financiers want a ratio of no more than 28 percent. For example, if your monthly income is $5,000, you will have difficulty obtaining approval for $2150 in monthly housing expenditures even if you have no other commitments. Your housing expenditures should be less than $1,400 if you have a front-end DTI of 28 percent.

If you don’t have any other debt, why wouldn’t you be allowed to use your total debt-to-income ratio? Fundamentally, lenders don’t like it when you live on the edge. Financial misfortunes occur—you lose your job, your car is damaged, or a medical condition stops you from working for an extended period. If your mortgage is 43 percent of your income, you won’t have any wiggle room to spend additional costs when you want or need to. The majority of mortgages are lengthy obligations. Remember that you may have to make those payments every month for the next 30 years. As a result, you should assess the dependability of your primary source of income. It would help if you also thought about your future possibilities and the probability that your costs may grow and grow.

It’s advisable to put down 20% of the purchase price (PMI) to avoid paying private mortgage insurance. PMI is typically included in mortgage payments and can add $30 to $70 to your monthly mortgage for every $100,000 financed. However, there may be several circumstances why you may not want to put down 20% on your transaction. For example, perhaps you don’t intend to stay in the house for long or have long-term intentions to turn it into a financial asset. Similarly, you might not want to put down that much money. If this is the case, purchasing a house without a 20% down payment is still doable.

For example, with an FHA loan, you may purchase a home with as little as 3.5 percent down, but there are advantages to putting down more. 5 In addition to avoiding PMI, a more significant down payment equals fewer mortgage payments—for a $200,000 mortgage with a 4% fixed interest rate for a 30-year term, you would pay $955. On the other hand, if your mortgage were $180,000 with a 4% interest rate for 30 years, you’d pay $859 and have more options among lenders—some lenders won’t provide a mortgage until you put down at least 5% to 10%.
The capacity to buy a new house today is far less essential than the ability to afford it in the long run. So, long story short, being able to buy a home and having a down payment does not address the issue of whether now is an excellent time to pursue that choice.

Provided you’ve taken care of your finances, the next thing to consider is housing-market economics—either in your present location or in the one where you intend to go. A home is a costly investment. Having the funds to make the purchase is fantastic, but it doesn’t solve whether the purchase makes financial sense. Yet another method to achieve this is to answer the question, “Is renting cheaper than buying?” If buying is less expensive than renting, that’s a solid case in favor of buying.

Likewise, it is essential to consider the long-term ramifications of a house purchase. Buying a property was nearly always a foolproof method to generate money for decades. Your grandfather may have purchased a property for $20,000 1950s and sold it for five or ten times that amount 30 years later. Although real estate has generally been thought to be a secure long-term investment, recessions and other natural calamities may put that notion to the test—and make would-be homeowners reconsider. For example, several homeowners lost money during the Great Recession when the real estate market fell in 2007. They ended up holding properties worth considerably less than the price they acquired them for many years following.

If you are purchasing the property with the expectation that it will increase in value over time, then be sure to include the cost of mortgage interest payments, property renovations, and continuing or regular upkeep in your estimates.

Similarly, there are years when real estate values are low and years when they are excessively high. If costs are so cheap that it’s apparent you’re receiving a fantastic bargain, it’s a positive indicator that now is an excellent time to make your buy. In a buyer’s market, low prices enhance the likelihood that time will work in your favor and allow your home to rise in value in the future.

It is too early to predict what will happen to house prices in 2021. However, if history repeats itself, we may anticipate a decline in housing values due to the COVID-19 epidemic and its significant economic impact. But, again, interest rates and the time of year are most likely factors.

Are you prepared to purchase a home? In a nutshell, yes—if you can afford it. But the affordability isn’t as easy as the amount of money in your bank account right now. Therefore, other financial and lifestyle factors should be factored into your estimates. When most of these factors are considered, the phrase only if you can afford to do it becomes more complicated than it looks. However, taking them into account now might help you avoid costly mistakes and financial issues later on. Then, of course, there is one occasion when you should pounce: when you locate the perfect property in the right location for sale—at the ideal price.