How to Evaluate Your Financial Situation Before Buying a House
Buying a home is one of the largest purchases you’ll likely make, and it’s important to make sure your financial house is in order. Start by reviewing your bank accounts and billing statements to get a handle on how much money you’re making and spending each month. If you’re planning to buy a house with someone else (like your spouse), review their finances as well, and then ask yourself some questions:
- Do you have a stable income/job?
- Are you able to put away some money each month into a savings account?
- Do you have a plan for managing debt, like student loans and car payments?
- Do you typically pay your credit card debt quickly? Keeping your credit debt low will help you qualify for a better mortgage.
- Do you have some money already saved up for emergencies? A good rule of thumb is having three months of income saved.
- Do you have some money saved up for a down payment and closing costs? You should avoid using your emergency savings for this, or you could put yourself in a tight situation.
Determining Your Down Payment
How much you need for a down payment depends on the type of loan and how much the house costs, but the more you can put towards a down payment, the lower your monthly payment can be and the more you’ll save on interest. Conventional loans typically require a down payment of at least 5% of a home’s price. FHA loans require as little as 3.5%.
Along with your down payment, you’ll have to pay closing costs, or fees associated with processing and securing your loan. These can vary depending on the price of the house and the type of mortgage, but estimate between 2% and 5% of the home’s value.