By: Jerika P – i-Lead Realty Social Media Manager
When deciding to purchase a home, the first step is determining whether or not you can afford the financial obligation. Without a clear plan detailing how you will finance the purchase, it is best to avoid any other forms of financing before home buying. This is due to the potential pitfalls of overextending your budget and dealing with increased financial stress down the line.
Mortgages
When looking to purchase a home, people tend to become overwhelmed by the magnitude of the decision. After all, the mortgage loan one takes to buy a home is likely the largest loan they will ever apply for. As a result, many buyers are tempted to finance other things before home buying in order to feel relieved of the financial burden upfront. However, financing anything ahead of a home purchase could substantially reduce your chances of obtaining the loan and could further limit your buying power.
Debt-to-income ratio
When applying for a mortgage loan, lenders typically require that you provide evidence of income, credit score and other financial indicators. Taking additional loans before purchasing a home, or simply overspending, could have a significant impact on your ability to secure a mortgage loan. This is due to the fact that lenders use a debt-to-income ratio (DTI) to determine the amount that they are willing to lend you. This ratio determines how easily you can manage the payments associated with the loan, so having prior debt and/or incurred credit card bills can make it much more difficult to obtain a loan.
Buying Power
Another important factor to consider is buying power. The greater your financial obligations before securing a loan, the less financial power you have throughout the buying process. This is particularly true when it comes to homeowners insurance and other potential costs associated with buying a home. Prospective homeowners should try to remain financially flexible before finalizing a purchase.
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