Can you afford to buy a home?

5 HOME PURCHASE QUALIFICATION QUESTIONS

1. How much of your target purchase price have you saved for a down payment?

a) Less than 5%

b) Between 10% and 20%

c) 20% or more

2. What percentage of your pre-tax income will you need to pay to cover mortgage, property taxes and homeowner’s insurance on a home in your target price range?

a) 35% or more

b) Between 28% and 35%

c) Less than 28%

In general, no more than 28 percent of your pre-tax income should go toward your mortgage, property taxes and homeowner’s insurance.

3. What is your employment status?

a) I recently started a new career

b) I am self-employed or work on commission

c) I’ve been on salary at the same company for several years

Lenders like to see at least two years of employment stability,

4. What other debts do you have?

a) I have a substantial amount of debt (such as a car loan, student loan and large credit card balance

b) I have a small amount of debt (such as a small car loan and a credit card balance that I usually pay off every month)

c) I am virtually debt-free

The rule of thumb is that no more than 36 percent of your pre-tax income should go to paying off debt, including the 28 percent maximum for mortgage, taxes and insurance.

5. What is your credit score?

a) Below 620

b) Between 620 and 720

c) Over 720

The interest rate you obtain on your mortgage will be closely tied to your credit score. And a low credit score may affect your ability to get a loan. A score over 720 should get you a favorable rate.

Adding up your score:

Give yourself zero points for every question that you answered with an A, one point for every B and two points if you chose C. 8 to 10: Congratulations! You’re well-positioned to become a homeowner. You’re in good financial shape and are well prepared to start shopping for a loan.
6 to 7: You may be able to purchase a modest house, however, you may find it a struggle to meet your mortgage payments. It may be wise to save more for a down payment and / or raise your credit score. Within a year or two you should be well on your way to your first home. 5 or less: Your financial situation needs to improve before you buy a house. Spending the next few years improving your credit, paying off debt, building your savings and establishing a stable employment record will bring you much closer to achieving your dream of owning a home.