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Let us begin with this basic question – Are you ready to buy a house? Then ask yourself another question – What can I afford? Though answering that may not be so easy, let us see how to really analyse what “affordability” means.
The most obvious decision involves money. If you have sufficient means to purchase a house for cash, then you can certainly afford to buy one. Even if you can’t pay in cash then you can apply for a home loan.
The debt-to-income ratio (DTI) standard is generally used as a guideline for approving loans. This ratio is used to determine if the borrower can make his payments each month. A DTI includes all your regular debt payments, including your new housing-related expenses – home loan, loan insurance, property tax, homeowner’s insurance, etc. and these shouldn’t exceed more than 28% of your monthly gross income. Remember, that you will have to make EMI payment every month for the next 30 years. You should accordingly evaluate the reliability of your primary source of income. Also, consider your prospects for the future and the likelihood that your expenses will rise over time. Being able to afford a new house today is not nearly as important as your ability to afford it over the long duration.
Assuming that your personal money situation is under control, you should look into the housing market economics. A house is an expensive and long term investment. Even if you have the money to make the purchase, ask yourself whether the purchase makes sense from a financial perspective. Would it be cheaper to rent than to buy? If buying works out to be less expensive than renting, then the best advice would be to hire a house.
If you are buying the property as an investment make sure to include the cost of interest payments, developments done to the property and its routine maintenance into your calculations. In the real estate market, there are times of high escalation of property prices and at the other times, there could be a recession period. The depression in prices increases the odds in your favor as you might be able to get a house at a cheaper rate and also that your house has all the possibility to appreciate down the road.
Before buying a new house, save the proceeds from your current home and determine whether or not, after factoring other expenses if you will be able to afford the mortgage. Remember that additional funds will have to be allocated for any maintenance and utilities where the cost will be higher for a bigger home. When you calculate, use your current income. You can’t assume that you’ll be making more money in future, as raises aren’t certain, and careers change. If you plan to buy the new home based on future income, you will be going to take more loans and end up with a long-lasting relationship with them. However, if you can handle these extra house costs without getting into further debt, then you can buy a new house, provided you have saved up enough money for your down payment.
There are a lot of benefits with a larger down payment, but is it sensible to sacrifice your emergency savings account completely to put more down on your home. You could end up with a shortage of funds, if an unexpected requirement arises.
Though affordability should be the priority while buying a home, you also need to understand that you would be living in the home you pick for at least 10 years. Unless that’s the case, you could get stuck with a house you can’t afford, in a city you aren’t ready to stay in. If you still want to buy a home without a 10-year plan, buy one which lower priced than the maximum you can afford.
So are you ready to buy a new larger house? Go for it only if you can afford so. Affording includes many other financial and lifestyle considerations which will be added into your calculations. Though the best time to jump in would be. if you find the perfect house in the perfect place at a perfect price.
