Before thinking about going online in search of homes, do a serious audit of your finances. You need to be prepared for both the purchase and the ongoing expenses of a home. The results of this audit will tell you if you are ready to make a big commitment, or if you need more time to prepare. Follow these steps in checking your financial health:
Make sure you have enough savings for three to six months worth of living expenses. You should not consider buying a home before acquiring that amount. Why? Because when you buy a home, there will be considerable upfront expenses which include the down payment and closing costs. You need money put away not only for those costs but also for an emergency fund that lenders will require.
One of the biggest challenges in saving is to put it in an income-generating medium to help you keep up with the inflation. If you want to meet your goal in 1 to 3 years, a certificate of deposit may be good for you. It is not going to make you a lot of money, but you are not going to lose any. Still, you need to keep an eye for early cashing out penalties.
Another choice would be a high-yield savings account. This is if you want to reach your goal sooner, perhaps in 6 to 12 months. For that, keeping the money liquid is the best option. Make sure it is FDIC-insured (most banks are) so that if the bank goes under, you will still have access to your money up to $250,000.
You need to know exactly how much you're earning every month—and where it's going. This calculation will tell you how much you can allocate to a mortgage payment. Make sure you account for everything: utilities, food, car maintenance and payments, student debt, clothing, kids' activities, entertainment, retirement savings, regular savings, and any other miscellaneous items.
Generally, to qualify for a home loan, you'll need good credit, a history of paying your bills on time, and a maximum debt-to-income (DTI) ratio of 43%. Lenders these days prefer to limit housing expenses like principal, interest, taxes, and homeowner's insurance, to about 30% of the borrower's monthly gross income. However, this amount can differ depending on the local real estate market.
