Buying a new home is a long term commitment. It requires a whole lot of research, time, money and energy. From seeing multiple properties to applying for a mortgage pre-approval, from finding the right estate agent to negotiating the best deal possible, there is so much that goes into the process of buying a house. And let’s not forget the costs involved in buying a new property! Not only does one need to consider the sale price and down payment, but additional costs such as land and property taxes, recording and processing fees as well as property insurance also play a significant role in the total cost of buying a new home. Let’s not forget about closing cost,s which can amount to a whopping 1 per cent of the property’s total value. To put it very simply, a buyer needs to be financially ready to buy a new home. Here are the three primary financial things that you, as a potential buyer, need to check before buying a new house in 2021!
1. What’s your budget?
Before you start looking at properties, you need to finalise exactly what your budget is. This budget needs to specify the maximum amount of money you can comfortably spend on buying your new home. Keep in mind and your budget needs to include the initial down payment, the cost of hiring a property evaluator, the real estate agent’s fees, the land and property tax, the cost of purchasing home insurance, and so on. And of course, you need to have enough money to be able to pay your essential utility bills and continue living your day to day lives without burning a hole in your pocket. So, before you start talking to estate agents in Manchester to buy your dream home, you need to sit down with a financial expert and figure out exactly how much money you can afford to spend on your new home. Once you do decide on a reasonable budget, make sure that you stick to the budget! Have a candid conversation with your real estate agent and let him or her know your exact budget so that you can start looking at properties that meet all your criteria.
2. What’s your credit score?
Most banks and lenders give out mortgages based on your credit score. The higher your credit score, the better your chances of getting pre-approved for a mortgage. The lower your credit score, the higher your chances of getting disapproved for a mortgage! In order to have a good credit score, you need to start working on improving your credit score at least 8 to 12 months before you even start looking at properties. Make sure all your utility bills are paid, ensure you have no outstanding debts, pay off your credit card bills and try to reduce your overall debt as much as possible. Also, it is highly recommended that you do not take out any significant loans such as car loans or apply for a new credit card when you start looking at properties, as these loans and credits will impact your credit score. One of the best ways to improve your credit score is to start paying your bills on time. As soon as you start deferring the payment or making half-payments, your credit score will go haywire.
3. What’s your debt to income ratio?
Apart from the credit score, most lenders also look at an individual’s debt to income ratio. The debt to income ratio is your total monthly debt payments divided by your gross monthly income. Let’s say your gross monthly income is £6,000. Your monthly debt payments are £1500, including your credit card bill, your utility bills and your car loan. So, your debt to income ratio is £1500 divided by £6,000, which is 0.25 or 25 per cent. That is an outstanding debt to income ratio. As per the Consumer Financial Protection Bureau, your debt to income ratio should not exceed 43 per cent. So, the lower your monthly obligations and the higher your gross monthly income, the better your debt to income ratio will be. You must calculate your monthly expenses – this can include school fees, childcare costs, nanny fees, fixed utility bills, family phone bills, gym memberships and so on. Once you know exactly how much you are spending every month, you will get a fair idea of how much money you will be able to put aside to pay off the mortgage.