What's in this article?
Although debt is occasionally referred to as a bad four-letter word, not all debt is bad debt.
For instance, a good debt to have is a mortgage. A mortgage can help you gain equity while also raising your credit score.
Read on to find out how a mortgage fits into your overall financial plan in 2023.
What is your overall financial plan?
A financial plan provides a detailed picture of your current financial situation, your financial objectives, and any plans you have made to reach those objectives.
Good financial planning should include details on your cash flow, savings, debt, investments, insurance, and any other aspects of your financial life.
A financial plan can be made independently or with the assistance of a professional financial planner and begins with a detailed assessment of the person’s present financial situation and future expectations.
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How does homeownership fit into a financial plan?
Homeownership is one of the most efficient and practical ways to accumulate real wealth.
The road to homeownership can appear difficult and unreachable, particularly in the current housing market.
However, being aware of the possible advantages of homeownership encourages people to buy rather than rent. Renters miss out on wealth-building opportunities, including equity, mortgage interest deductions, and long-term economic benefits.
Although purchasing a home is a major investment and can be costly upfront, the long-term costs, and benefits of home ownership almost always outweigh those of renting.
That makes working a mortgage into your financial plan a must.
How much house can I afford?
Finding out how much you can afford is an important stage in the home-buying process because buying a house is one of the biggest expenditures you will ever make.
This question is also why a financial plan is important—so you can create financial goals and reach them responsibly.
You should start by comparing your employment income, investments, and any other sources of income to the amount going out each month. Think of expenses like school loans, credit card bills, and auto payments.
List your projected monthly housing expenses and total down payment after that. Include the conditions of the loan, expected mortgage interest rates, annual property taxes, and homeowners insurance expenses (or how long you want to pay off your mortgage).
Although 30-year loan periods are the most common, some borrowers choose shorter loan terms.
An affordability calculator is a handy tool to help you figure these numbers out and come up with an affordable number.
How much of my net income should go to a mortgage?
The 28/36 rule, commonly recommended by financial advisors, states that you shouldn’t spend more than 28% of your gross, or pre-tax, monthly income on housing.
And no more than 36% of your monthly income should be spent on total debts, including credit cards, and other loans, like auto and student loans, which is a good general guideline for determining “how much house” you can afford.
For instance, if your monthly income is $5,000 and you have $500 in monthly debt payments, your monthly mortgage payment for your home shouldn’t be more than $1,480.
Although the 28/36 guideline is a widely-recognized starting point for calculating home affordability, you should also evaluate your overall financial status and consult your financial plan when determining how much house you can buy.
What is DTI and what should mine be to buy a home?
Your debt-to-income ratio (DTI) is another factor that lenders will consider in determining how risky it is to issue you a loan.
Your DTI is the number you just figured out above—how much debt you have compared to your income.
DTI maximums are set by lenders and are an obstacle for some applicants. For conventional loans, for instance, lenders prefer debt-to-income ratios of less than 43%, while in some situations, the threshold is set at 50%.
It’s a good idea to pay off your credit cards and other regular bills like student loans and auto payments if you want to reduce your DTI before applying for a mortgage.
What are my next steps in home ownership?
After deciding to buy a house, there are several steps you should take to ensure the process goes smoothly.
Determine your budget
It’s important to know how much you can afford to spend on a home before you start looking. Work with a mortgage lender or financial advisor to determine how much you can borrow and what your monthly payments will be.
Get pre-approved for a mortgage
Getting pre-approved for a mortgage will give you a clear idea of how much you can qualify to borrow and will also make you a more competitive buyer in the market.
To get pre-approved, you’ll need to provide your lender with financial information, such as your credit score, income, and assets.
Start looking for a home
Once you have a budget and a pre-approval letter, you can start looking for a home. Consider factors like location, size, and style, and be open to compromise.
It may take some time to find the perfect home.
Make an offer
Once you’ve found a home you love, it’s time to make an offer. Your real estate agent can help you determine a fair offer price and negotiate with the seller on your behalf.
Get a home inspection
Before you close on a home, it’s a good idea to get a home inspection to ensure there are no major issues with the property. A home inspector will examine the property and provide a report detailing any issues that need to be addressed.
Close on the home
Once you and the seller have agreed on a purchase price and any necessary repairs, it’s time to close on the home. This typically involves final approval from the lender and paying closing costs, such as lender fees and property taxes.
Take your next steps with Homefinity
At Homefinity, we understand that owning a home is a major financial and personal milestone.
That’s why we offer great mortgage rates and our own Cash Assurance program, which gives you the buying power to compete with a cash buyer, to help make your dream of homeownership a reality.
Our team of expert mortgage advisors is here to help you find the right mortgage option for your unique situation and work with you every step of the way.
The information provided in this article is for educational purposes only, and does not constitute financial planning advice – please consult a financial planner regarding your specific situation. Homefinity does not guarantee a mortgage loan will result in equity gains or tax advantages. Any potential benefits from homeownership are based on individual factors. Contact your Homefinity loan officer for more information regarding your specific situation.
Photo by Sora Shimazaki