Buying a new house is a long-term financial commitment. Whether you’re buying a house for the first time, whether you’re shifting from one house to another or whether you’re just purchasing a new house as an investment, it is always a daunting process. While you can always hire estate agents to make the job easier, these could be estate agents in Bicester or agents in Bristol, the process of buying a house is still tedious. You need to have all your finances in order, you need to be sure of this long-term investment and you need to do a lot of research before you take the next step. If you’re thinking about buying a new house this year, make sure to keep these 3 financial factors in mind.
1. Can I afford to buy this house: Account for the cost of everything
Stick to a simple rule of thumb – the value of the new house should not be more than three times the value of your annual income. Let’s say your annual income is $150,000, then you should not even consider buying a property that costs more than $450,000. By sticking to this simple rule of thumb, you will be able to pay your mortgage, the initial deposit (which can be anywhere between 5 per cent to 15 per cent) and all the other costs that are part and parcel of the buying process. Do not forget to factor in costs like stamp duty, legal fees, real estate agent fees, surveyor fees, the cost of maintenance and repairs, the cost of moving, home insurance, initial cleaning costs and so on. Once you have bought the house, you need to consider monthly expenses like utility bills, wifi bills, council tax, parking fees and so on. Be sure to do thorough research so that these additional costs do not burn a deep hole in your pockets.
2. What is my current credit score: The higher the score, the higher the chances of pre-approval
You need to start working on your credit score at least 8 to 10 months in advance. That means, paying all your bills on time, clearing your credit card payments, clearing off any pending debts and make sure you don’t miss making any payments. Usually, a credit score that is higher than 740 is considered very good. If you have a good credit score record, it will be much easier for you to apply for a mortgage and possibly even get pre-approval. Also, a good credit score often means that you will get attractive mortgage offers in terms of a lower rate of interest or even some special rates. If a lender sees that you are capable of paying back the mortgage within a given time period, they will be more willing to loan you that amount without hesitation, at a lower rate of interest. If your credit score is low, there is a high possibility that your mortgage application could even be rejected.
3. How much can I afford to borrow: How much can you afford to pay back every month
Mortgage lenders base the loan amount on a simple loan to income ratio. You can borrow three to five times your income, but usually lenders cap this amount at four and a half times your income. So, let’s assume you make $150,000 – that means, you will most likely get a loan that will be between $450,000 to $750,000. To decide the final amount, lenders will analyze your yearly income, what your monthly personal expenses are, your credit score and your ability to pay back the loan. While the lenders are doing their job, you need to assess how much you can afford to borrow. If you are going to borrow $500,000, how long will it take you to pay back the principal amount coupled with the monthly interest? Will you be able to pay this amount monthly, without burning a hole in your pocket? Does this mortgage allow you to live comfortably, pay your other expenses and still save? Would you rather pay this amount over 5 years or 15 years? You need to consider all these factors before you accept the terms and conditions of the mortgage. Without proper research and understanding, you might be stuck paying off your loans without having enough money for your daily expenses.
You should also get a property valuation and a property survey before you sign any final contracts. A property valuation will basically tell you the approximate price of that property in the market – if the seller is asking for more, this property valuation will give you an upper hand when it comes to negotiating. You should also hire a property surveyor to survey the property – this will ensure due diligence from your end. After all, you don’t want to build your property on someone else’s land and end up paying a costly price for that.