How to assess affordability for home ownership?

Being an owner of a house is a dream for many. Everyone wants to own a house in their lifetime. However, assessing your affordability for the same is a significant step. It is the first step one should take after starting the homeownership process. This requires careful consideration of all surrounding things and financial planning. Knowing and assessing your affordability for homeownership and awareness of all aspects related to it is equally important.

See also: Does affordability mean you will have to compromise on what you need while buying a home?

 

Prepare a layout of a budget

Before proceeding with the process of homeownership, it is important to thoroughly assess your financial scenario. You can start by assessing your monthly income, debts, expenses, and savings to better understand your current situation. It is important to determine how much you can afford by laying out a detailed budget. Remember to give equal importance to saving portion to secure for future emergencies. Account for any outstanding debts and loans.

 

Debt-to-income ratio calculation

After preparing a budget, start calculating the debt-to-income ratio. Usually, this ratio is used by lenders to assess your ability to handle any additional debt or a mortgage. To calculate your debt-to-income ratio (DTI), you need to add up your monthly debt payments and divide it by gross monthly income. The income will not include taxes.

 

Down-payment

Saving for a down payment is considered significant to assess your affordability. Most lenders demand a down payment ranging from 3% to 20% of the home’s purchasing price. The lesser the down payment is, the more the mortgage increases. So, try to keep the percentage of the down payment as high as possible. You can start saving for the down payment well in advance to have the necessary funds at the required time.

 

Equated monthly instalment (EMI)

Equated Monthly Instalment (EMI) is a home affordability option that many financial institutions offer. These flexible payment plans can prove a game-changer for potential homeowners. This option usually aligns with the borrower’s financial layout and budget. Selecting the best EMI option depends on factors like flexibility needs, income projections, risk tolerance, and long-term goals.

Read also: Can banks auction property if borrower defaults on loan EMIs?

 

Check your credit score

Credit score plays a pivotal role in assessing the interest rate you will be receiving on your mortgage. It is important to maintain a higher credit score, which will ensure a lower rate of interest for you, the same way a lower credit score ensures a higher interest rate. This can significantly impact your monthly payment. Check your credit reports regularly and report any errors. Focus on improving the score if needed, like paying bills on time and clearance of any outstanding debts.

 

Pre-approved for a mortgage

Obtain a pre-approval on a mortgage. This step requires submitting your financial documents to the lender who will eventually evaluate and assess your creditworthiness and pre-approve you for a certain amount of loan. Make sure to submit the documents to a reputable lender after checking his track record. Pre-approval for a mortgage will give a clearer picture of the budget.

 

Evaluate the real estate market

Assess the real estate market in your desired housing location. The market can fluctuate, and it is better to prepare a report on everything before considering a particular location. It is advisable to buy the property if the conditions are favourable.

 

FAQs

What credit score is needed to get a pre-approval for a mortgage?

The minimum credit score required varies among lenders but is typically around 620 to 640 for traditional mortgages. However, some government-backed loan schemes may accept lower credit scores.

What factors can influence mortgage interest rates besides the credit score?

Some factors that can influence mortgage rates are the inflation rate in the economy, overall economic health, timings and type of loan borrowed and prevailing market conditions.

What is Private Mortgage Insurance (PMI), and when is it needed in assessing your affordability?

Private Mortgage Insurance (PMI) is needed if you make a down payment of less than 20% of the home's purchase price, as the range for a down payment is 3% to 20%.

Is hiring a real estate agent useful in the home-buying process?

While it's not always necessary, hiring a real estate agent can be beneficial. A real estate agent can provide insights into the local real estate market, help you find suitable properties in your desired location, and assist with negotiations, potentially saving you time and money and proving valuable.

Should I focus on paying off existing debts before starting the home-buying process?

Yes, paying off high-interest debts before buying a home can enhance your financial position and increase your chances of securing a favourable mortgage rate. This will also increase your credit score.

Is getting pre-approval for a mortgage beneficial?

Pre-approval for a mortgage involves submitting your financial documents to a lender. The lender assesses your creditworthiness, and it is beneficial as it pre-approves you for a specific loan amount.

What is the meaning of closing costs, and how much should I save for them?

Closing costs refer to the additional fees associated with finalising the home-buying process, and this includes appraisal fees, title insurance, and legal fees. These costs typically range from 2% to 5% of the house's purchase price.

Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at [email protected]