For most of us, buying a home is the biggest purchase of our lives — and the process is far from simple. Here are nine steps to take to make sure the home you buy is one you can afford:
1. Check your credit score and look at your cash flow.
Start by checking your credit score. "The higher your score, the better the interest rate on your mortgage will be," writes Ramit Sethi in "I Will Teach You To Be Rich" Good credit can mean significantly lower monthly payments, so if your score is not great, consider delaying this big purchase until you've built up your credit.
As for monthly payments, personal finance experts say a good rule of thumb is to make sure make sure the total monthly payment doesn't consume more than 30% of your take-home pay.
It's also to your advantage to plan on being in this home for a while — at least 10 years, Sethi recommends. "The longer you stay in your house, the more you save," he explains. "If you sell through a traditional realtor, you pay that person a huge fee — usually 6% of the selling price. Divide that by just a few years, and it hits you a lot harder than if you had held the house for ten or twenty years." Not to mention, moving costs can be insanely high.
2. Have cash for a down payment.
Technically, you don't always have to put any money down when financing a home today, but if you can't afford to put at least 10% down, you may want to reconsider buying, says Sethi.
Ideally, you'll be able to put 20% down — anything lower and you will have to pay for private mortgage insurance (PMI), which is a safety net for the bank in case you fail to make your payments. PMI can cost between 0.3% and 1.50% of mortgage, depending on the size of your down payment and your credit score.
3. Plan for the surprise expenses.
Even if you can afford the monthly payment, be aware of hidden costs. Buying a home means property taxes, insurance, and maintenance fees that can add hundreds of dollars per month.
Check out the New York Times' "Is It Better To Rent Or Buy?" calculator, which factors in things such as maintenance, renovations, closing costs, taxes, inflation, and cost of buying and selling, to help you decide whether renting or buying makes the most sense for you.