Dubai: When it comes to buying a house, while there are a number of savings related factors to weigh before taking a decision – the best time to buy a house is when you have enough saved for a down payment, such that your overall financial health won't suffer after the purchase.
Another vital aspect to consider is whether you have a strong credit score and if you’ll qualify for the lowest rate; and also if property market conditions in your area reflect realistic pricing. Moreover, you will also need to consider how long you intend on living in the home, as this affects your finances too.
As a general rule of thumb, even the most lenient banks won't lend to you if you have a score of under 400 – and some won't accept scores of less than 500. So the bottom line is that if you're ever planning to buy a house, you'll need to ensure you have a healthy credit score.
Most of us know buying a home is a major financial commitment and no matter how many times you crunch the numbers or visit open houses, it can be difficult to make the leap.
There are some indications financial planners point towards that will help you know if you are ready to buy a home, and they have less to do with the overall housing market and more to do with your personal financial situation.
How much savings do you want to shell out for a new home?
If you can’t gather up a down payment of at least 10 per cent and ideally 20 per cent of a home’s worth, property consultants suggest you aren’t ready to buy a home. The more you put down at the onset, the smaller your mortgage and the less you’ll have to fork over in interest.
Beyond the property, owning a home comes with additional costs that first-time homebuyers may not be aware of. So it's important to inquire about and account for closing costs and homeowner’s insurance, as well as regular maintenance and repairs.
When all the closing, moving and miscellaneous costs add up, you could be out a few thousand dirhams beyond the home's marked price. Considering the historical home appreciation rate, matter experts say it generally takes five years or more to break even.
What to do before you decide to buy: A tip guide
If you’re thinking about buying, follow these steps before making your move.
1. How much debt do you currently owe? Calculate your current debts, including car loans, credit card payments, and student loans. Remember the below 28/36 rule.
Conventional lenders often use the so-called 28/36 rule when determining whether to offer you a loan. Your house-related payments (mortgages, insurance) shouldn’t exceed 28 per cent of your income, and all other combined debts shouldn’t exceed 36 per cent of your monthly income.
2. How much available cash you have? You’ll want enough to at least cover your down payment and closing costs, and don’t forget to leave enough in your bank account to cover any emergencies that might arise.
3. How much cash should be down payment? Ensure you can put enough money down. Traditionally, lenders have required down payments equal to 20 per cent of the home’s purchase price.
For instance, putting 20 per cent down on a Dh300,000 home would require Dh60,000 in the bank — plus an additional Dh9,000 or so for closing costs.
4. Should you get pre-approved for a loan? Contact a bank or lender to get preapproved for a mortgage. This doesn’t require you to accept the loan; it’s just a way of showing real estate agents and sellers that you’re serious about investing. This is one of the first things a prospective agent will ask.
What banks consider a ‘green light’ to approve your home loan
Before they approve you for a home loan, lenders want reassurance that you have enough money coming in to cover the cost of the mortgage and will continue to do so for the foreseeable future. To them, that proof comes in the form of a stable employment history.
The next thing that lenders take into account before approving you for a mortgage is your debt-to-income ratio (DTI). Your debt-to-income ratio, like we touched upon earlier, is a measure of how likely you are to be able to afford another loan, given your current debt obligations and how much money you have coming in each month.
A low DTI percentage ratio is more attractive for lenders, whereas anything over 50 per cent will mean that you are unable to obtain any further credit. As a thumb rule, you'll want to keep it around the 30 per cent mark.
While making sure that you have enough money to cover your mortgage payment each month, your lender will also want to verify that you have a sufficient amount of savings to shoulder the upfront costs of buying a home.
So keep an eye on how much you can afford to put as down payment, while having the ideal credit score to get a low-rate loan is important too – in the recommended respective amounts indicated above.