How do I know if I am financially ready to buy a home?

First Time Buyer Specialist Gabrilyn Lee Realtor-Associate West Oahu Realtor

Ultimately, this is an answer that only you & your lender can determine, once you've asked the following questions below:

Do I have a steady source of tax reported income?

Upon applying for a loan, your lender will request your financial documents including your last two year's W2's (or 1099 if self-employed) plus your federal tax returns. Your tax reported income will be the income primarily used to determine how much you can qualify for.

Have I been employed consistently for the last 2 years?

Most lenders will want to see that you've been with the same employer for at least two years. If you haven't, they will want to at least ensure that you were in the same industry. Switching employers too frequently or changing industries appear as a red flag for lenders. Stability is key.

Do I have a good credit score?

Credit score is the primary reason that prevents prospective buyers from becoming homeowners. The higher your credit score, the better interest rate and more favorable terms you will receive.

Do I have little to no outstanding debts?

Lenders will determine what you can qualify for using debt to income ratio. This means that any long term debt, like car payments or a student loan, will impact how much you can qualify for. While it is not necessary for you to be entirely debt-free in most cases, it is important to keep your debts to a minimal.

Do I have money saved for a down payment and closing costs?

The common misconception is that 20% down is an absolute requirement in order to buy a home. This is not the case. In fact, many first-time buyers opt to put down payments as low as 3-5% down. However, anything below 20% down will require private mortgage insurance. The more down payment you choose to put, the lower your PMI and overall monthly mortgage payment will be. Most buyers will choose to put down payments ranging from 3%, 5%, 10%, or 20% down.

Closing costs are an additional expense that buyers and sellers should also be accounting for. Some of these costs are split between buyer and seller, including:

  • Title Insurance
  • Escrow Fees
  • Conveyance Taxes

Other closing costs are typically a buyer's expense, including:

  • Lender fees
  • Appraisal cost
  • Credit report fees
  • Home inspection
  • Etc.

Do I have the ability to pay a mortgage every month plus the cost of other additional homeowner expenses?

In addition to a monthly mortgage, a prospective buyer should also account for other monthly expenses that come with being a homeowner. Your lender will account for most of these, including P&I, HOA fees if applicable, property taxes, and homeowner's insurance. It is up to you to calculate your other bills including electricity, cable, internet, water, etc.

The best way to determine what you can afford is to meet with a lender! Contact me on how to start.