There is no question owning a home is one of life’s most rewarding experiences. Not only is it fiscally smart, but it is also personally gratifying while rewarding you with a more profound feeling of home.
While buying, you may have an idea of what you can afford, but your home may be the most expensive item you own in your lifetime, so it pays to look at the numbers closely. The right planning will guard you against unhealthy financial risks and the stress that comes with them.
This article will help ensure your buying and owning experience is what you always dreamed it would be.
What to Keep in Mind When Buying a Home
The most important goal is to be able to afford the home long term. You never know how life will go, and what you buy now could very well be the last home you own.
To buy a home affordably, you should keep some key elements to keep in mind:
- Your down payment (unless buying with cash)
- Your Debt-to-Income Ratio (DTI)
- An accurate understanding of expenses
- Surrounding conditions
- Tricks that make home-buying more affordable
- Selling your home to buy another
Let’s dive into each of these factors in more detail.
Your Home Down Payment
For most people, buying a home requires a mortgage with a down payment. Most lenders won’t offer you mortgages without 10 or 20% down unless you qualify for a VA loan or HUD benefits.
The ideal down payment is 20%. This percentage reduces mortgage interest and helps you avoid mortgage insurance, which runs around 0.5 to 1% of your mortgage total annually.
A down payment is the first indicator of whether or not you have the money buy, but it isn’t the only one. You need funds to safeguard against repairs and emergencies and still have room to build savings to avoid working until you 90.
Your Debt-to-Income Ratio
Lenders require your Debt-to-Income Ratio (DTI) to determine your mortgage rates. Your DTI is the ratio of the money you owe vs. the gross money you make.
There are two types of DTIs: a back-end DTI and a front-end DTI. The back-end DTI relates to the income you spend toward debts outside of homeownership, such as credit cards and car loans. The front-end DTI calculates the ratio of gross income to housing costs. Of the two, the front-end DTI is what lenders pay closer attention to, helping them better understand their risk. They place a lot of value in that number. A good DTI can help you land a mortgage even if you have a lower than ideal credit score.
Lenders often look for a front-end DTI of no more than 28%, and this same percentage is also true here in Austin. To get your DTI, multiply 0.28 with your gross monthly income to get your monthly mortgage payment.
Though the DTI helps the mortgage company in risk analysis, your DTI also gives you a clearer understanding of what you can safely afford after adding your estimated monthly expenses.
An Accurate Understanding of Your Expenses
Combined with your DTI, listing all your monthly and annual expenses gives you a better read on what you can realistically pay. Take time to list out all of your spending habits and lifestyle needs – every one of them – to understand what you can afford and what you are willing to afford. We all have things we love to do or buy, and factoring in those costs helps you maintain a healthy life balance.
When listing your expenses, be sure to set aside funds for repairs and upkeep of your property. When buying, you don’t benefit from rental perks like free repairs on the roof, plumbing, appliances, or free maintenance of your landscaping. Everything is on you now, which can be intimidating at first. Be sure to maintain a monthly budget to cover future issues and keep this stress at bay. For a good look at how to account for these costs, check out this article from nerdwallet.com.
Be Realistic About Your Income
It is a good idea not to rely too heavily on higher future income to afford the home you want. There are plenty of factors that can affect your career goals, such as an economic slump and changes in demand for your job. You may not even want to do what you are doing for a living in 5 or 10 years.
Before buying, evaluate the home location closely for a clear and realistic understanding of resale profits and percentage increases year-over-year. Other factors like employment growth statistics may also affect resale profits.
Some economic factors that affect pricing come and go regardless of where you live, and you won’t have much control over them. The Great Recession is a good example.
More recently, some fear that COVID-19 will create an economic slump that can reduce home values. Luckily, Austin houses and condos consistently experience higher values even during COVID-19, thanks to the city’s continued growth. Why so much growth? Check out our previous article, Why Is Everyone Moving to Austin, TX.
Tricks that Make Home-Buying More Affordable
Here are tricks you can adopt to make homeownership more affordable.
Take Advantage of Low-Interest Rates
As of the time of this article, interest rates are especially low – between 2.86 and 2.91%, making it a great time to buy. COVID-19 has brought the lowest interest rates in years, putting more homes within budget and more opportunities to increase your savings.
Times of the Year You Buy
In Austin, all times of the year are competitive, but you may find shopping during the off-season works better for you. The busier spring and summer months may give you more selection, but you also have stronger competition from buyers. Shopping during quieter times of the year keeps competitive bidding down while helping you work more closely with sellers who need to sell quickly, working to your financial benefit.
Taking advantage of VA and HUD benefits
These benefits shouldn’t be passed up. Military members benefit from 0% down payments, and police officers can get a 50% discount on appraised values with only $100 down on specific properties.
Selling Your Home to Buy Another
Typically, buying after you sell your home is more common than buying a new home first. For a clear look at the pros and cons of selling while buying take a look at our recent article, Should I Sell My Home Before I Buy My Next Home?.
If you benefited financially from a recent sale, you might be inclined to buy a more expensive home with your profits. Keep in mind, however, that other homes on the market have increased in value as well. You may not be able to go as big as you thought. And buying a more expensive home requires more than just paying a higher mortgage amount. You could face higher costs in maintenance, repairs, and property taxes, all of which should be factored into your budget.
Choose an Experienced Realtor
When buying, it is important to protect yourself from overpaying. A seller’s realtor is working hard to generate high profits, and having an experienced real estate agent on your side who knows the area, local values, and tricks of the trade will ensure you get the best price possible.
If you are in the market for Austin real estate, we can help. Use our Austin Home Search and learn more about the ins and outs of moving to the Austin area with our helpful buying and moving guides and a wide range of articles. Our experienced real estate agents will help you find that home you always dreamed of in our beautiful city, and at a price that is equally attractive.