Household Finances and Mortgages: As Individual as You Are

Mortgage advice often comes in somewhat generalized forms, but it is also important to remember that every situation is different. Your household finances are as individual as you are.

Certainly, you can find tips on where to find low mortgage rates, how big a down payment you should save, and how much of your savings should go towards a house payment. All of this advice is worthwhile, as long as you put it in the right context. That context has everything to do with your individual situation.

The following are seven questions that will help you assess your individual situation to determine whether or not you are really ready to buy a house.

  1. Do you have a steady job? This may be the most fundamentally important question to ask yourself, more important even than how much money you make. The reason is that if you lose your job, everything can change. If you are about to make a major financial decision like buying a home, you should take a long, hard look at your job security. Have your recent employment reviews been good? How is the company's business doing? Have they been hiring lately, laying people off, or standing pat? Before you take on the obligation of a mortgage, this kind of examination will give you an idea of how reliable your income is.
  2. Are you living within your means? Credit cards are so readily accessible these days that people often think nothing of spending more than they make. As long as they don't hit their credit card limits, they feel as though there is nothing wrong. However, people who steadily build debt eventually hit a wall and no more credit is available. Plus, since the housing crisis lenders are much more sensitive to credit risk. If you have been accumulating debt, you may find it tough these days to qualify for a home loan. That may be just as well, because if you can't live within your means, the last thing you need is a new financial obligation.
  3. Do you have good credit? Even if your financial situation has improved recently, you need to look at a credit report to see if there is anything in your history that might make it hard to qualify for a home loan. If so, don't panic -- time and good habits can solve credit reporting problems.
  4. Do you know what you want for the long-term? Even if all your finances line up in favor of buying a home, you have to make sure you are ready to make that kind of long-term commitment. Houses are not liquid assets -- they can be especially tough to sell under pressure, and there is considerable cost associated with buying and selling a home. So, homes should usually be bought for the long-term, which means knowing everything from how the physical layout of the house will fit your changing needs over the years to how comfortable you are with the neighborhood.
  5. Would you have a hard time saving for a down payment? Larger down payments are popular with lenders these days. They can make it easier to qualify for a home loan and secure low mortgage rates, and they have the added benefit of starting you out with a decent home equity cushion. So, even if you could qualify for a lower down payment, you might want to question whether you want to. After all, if you find it difficult to save for a down payment, meeting monthly mortgage payments might prove burdensome as well.
  6. Would buying a house clean out your savings? People often cut their finances to the bone in order to buy a house. The eagerness is understandable -- nowadays, the normal excitement of buying a house is compounded by the pressure to take advantage of low mortgage rates while they are still available. However, it may not be wise to throw all your savings into the down payment. Keeping something back for emergencies can help make home ownership less stressful.
  7. Do you understand the details of the mortgage your are considering? Be sure you know all the ramifications that could affect your payments. For example, you might notice that one-year ARM mortgage rates are nearly two percentage points lower than 30-year fixed mortgage rates, according to figures from Freddie Mac. However, those adjustable rates are may reset every year, and could increase every year until your payments become unaffordable. Above all else, be clear on whether your payments are fixed or variable, and look over an amortization schedule to see how your payments will go towards paying down your balance over time.

If you answered "no" to any of the above questions, the problem may be solvable. A little extra time saving money or repairing credit, or perhaps a little closer study of mortgage terms and an amortization schedule might do the trick. However, if you come up with a "no" answer you cannot change to a "yes," it may be a sign you are not in a good position to buy a house.

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