6 Signs You Are Ready for a Home Loan
The Signs Are All Around Us
Much as we’d all like to buy our own homes, the reality is that many of us aren’t financially ready yet.
Buying a home before we can afford it can lead to negative consequences such as heavy debt or possible bankruptcy that could mess up our chances of owing a property again in the future.
But the good news is that some of us are already on the path toward homeownership!
Here are six signs that you might just be ready to buy a home of your own:
1. You know what you can afford
Affordability is one of the most important aspects of securing the financing you need to buy a home. But more often than not, buyers are tempted into pricey homes that they may not be able to afford in the long run.
To figure out how much you can afford when choosing a home and home loan amount, do work backwards to find a comfortable monthly repayment figure.
For instance, your repayments should not amount to more than one-third or 33% of your monthly salary.
So if you are earning RM5,000 a month, the ideal repayment amount should come up to RM1,650, more or less.
Now with this repayment figure, you should be able to afford a home priced at RM410,000. That is, with a 10% deposit, loan rate of 4.2% and the max repayment period of 35 years.
Of course, this is just a general guide. If you have fewer commitments, no other debts, etc., you may raise your repayment amount.
2. You’ve saved up the deposit
Although it is possible to buy a house without a down payment, it’s much healthier, financially, to have at least 10% or more saved up.
Placing a down payment shows financial readiness – you are demonstrating that you have planned for the purchase and are generating a good income, enough to have saved. Plus, the more you can pay upfront, the more you’ll save on interests.
If you don’t have a down payment ready, your options for home loans will be limited and the purchase as a whole becomes more expensive. Moreover, you may have to depend on governmental affordable housing programs as well as loan assistance schemes.
3. You are aware of ALL the costs
When buying a home, the deposit and monthly repayments are not the only financial expenses to think about. Yes, there are other costs too!
Expect to pay for legal fees for the Sale and Purchase of the property and loan contract, valuation fees, and stamp duties. These can easily cost up to RM10,000 or more (depending on the purchase price of the home and loan amount).
Some loan fees may be absorbed by the bank or worked into your loan and certain housing promos by developers might cover Sale and Purchase fees (for brand new homes).
Still, you should be aware of these costs and be able to cover them, where necessary. Apart from these, there are recurring payments to be made, such as assessment tax and quit rent.
You may also have to cover maintenance and sinking fund fees for strata-titled homes e.g. condos and some gated/guarded properties. With your eyes wide open to the true cost of buying a home, you are more than likely the type of person who is financially prepared to become a homeowner.
| See also: 7 Ways to Pay Less on a Home Loan |
4. You have a healthy savings account
If you are living from pay cheque to pay cheque without a cent saved up, it’s probably not the right time to buy a home. In fact, your readiness to buy a home will have a lot do with your ability to save.
Showing a healthy savings reserve displays good money management skills, especially when it comes to spending. What’s more, a large savings account can work as a back-up plan.
For instance, if you suddenly lose your job or suffer a financial setback; you’ll still be able to pay your home loan instalments (at least for the time being), as you sort your finances out.
You wouldn’t want to be in a situation where you can’t keep up with your home loan payments and have to lose your home.
Thus, if you don’t have any money saved in an emergency fund, it’s best to build up a cash account before moving forward to buy a home.
5. You have low debt commitments
Before buying a home, it’s important to ensure that your financials are in order. In line with garnering a strong savings account and having good credit, you’ll also need to ensure that you are not in heavy debt.
Do you owe a hefty sum in unpaid credit card bills or are paying off other previous borrowings e.g. personal, car and education loans?
If the answer is yes, then you might not be ready to own a home just yet. Banks will look at your level of monthly debt repayments in comparison to your monthly income aka the debt service ratio.
If you owe too much, banks may be reluctant to grant you a loan. This is because; they may (expectedly) assume that you will not be able to keep up with your repayments.
But how much debt is too much? While this depends on the evaluation criteria of individual banks, the general guideline is to have your debt service ratio be below 60%.
This figure is calculated by dividing your monthly financial commitments over total income.
6. You have steady employment or earnings
To be able to repay a loan, you must have some form of income. Thus, having steady, permanent employment or regular income earnings (i.e. through business, etc.), bodes well for home loan applicants.
In fact, this is one of the main factors that a bank will look at when considering a home loan application.
And note that certain types of employment are preferred when it comes to loans. For instance, long-term confirmed employees of a large MNC or those working with the government may make for better loan candidates than an applicant with irregular income.
If you are earning an irregular income, for example, through commissions or freelance work, do set up a safety fund with at least six months of your repayments saved up.
This will help you cover your payments during income uncertainties. To help with your loan application, do set up an FD with the bank, containing a healthy reserve that can be set off by the bank in the event of repayment issues.
All these signs along with good credit point toward your potential readiness to become a homeowner!