Lay Your Financial Base Before Buying a Home

Buying a home is a major investment and you must be well-prepared, as many Americans have learned the hard way. This means laying the proper foundation, then buying a house you can comfortably afford.

You lay the foundation by creating a solid risk management program. It should include an emergency cash reserve and medical, disability, and life insurance. This is essential because it helps protect your investment. For example, if you or your husband are disabled and can’t work, disability insurance will help you make the mortgage payments. After laying the foundation, you’re ready to start planning, based on the conventional guidelines for a 30-year fixed rate mortgage. In addition to your credit score, a lender will look at key ratios.

•Debt-to-income ratios. Most lenders will limit your mortgage payment to 28 percent of gross income and total debt payments to 36 percent of gross income. Your mortgage payment includes principal, interest, taxes and insurance.

•Loan-to-value ratio. Most lenders will require you to put 5 percent to 20 percent down, based on a home’s appraised value. For example, if you put $40,000 down on a $200,000 home and finance the rest, the loan-to-value is 80 percent. If you put less than 20 percent down, the lender is likely to require mortgage insurance.

Everyone who buys a home, especially a first home, wants to put their own personal stamp on it. Borrowing below your means leaves room to strip the old wallpaper and refinish the hardwood floors. Also, it leaves room for repairs and maintenance, an inevitable and sometimes costly part of homeownership.

Also of Interest 3 Gulf Shores Homebuying Mistakes You Need to Avoid

When you borrow below your means, you create flexibility in your financial plan. This allows you to enjoy current wants, like taking time off with children, replacing cars and taking vacations. Also, it allows you to provide for future needs, like saving for a secure, comfortable retirement. In the long run, effective financial planning is all about balance.

Planning tip: If you’re looking at non-conventional mortgages, do your homework and be sure you understand the risks. For example, adjustable-rate mortgages are fine when rates are stable or falling. But when they’re rising, they are hazardous to your wealth.