Renting a place to live may give you the freedom to move when you want and relieve you of the responsibilities of homeownership, but at some point, most people yearn for their own home.
Buying a house is a good way to start building financial security. As you pay down the mortgage, you build up home equity, which is a valuable financial resource.
Mortgage rates are low right now, so if you think you’re ready to buy a home, it’s a good time to make the move. “For prospective and actual homebuyers, the decline in mortgage rates has provided a much-needed boost to housing affordability,” says Mark Hamrick, senior economic analyst for Bankrate.
Deciding whether to rent or buy a home is a major decision. How do you know you’re ready? Here are eight signs that you’re ready to make the switch from renter to homeowner.
1. You’re tired of rising rent prices.
Rental prices are on the rise nationwide, according to ApartmentGuide, which tracks trends in the rental market. The average rent on a one-bedroom unit climbed 4.2% in 2018, to $1,140; two-bedroom units rose to $1,354 and studio apartments rose 5% to $1,065.
Rising rent makes it harder to budget for monthly housing costs and to save for other financial goals. When paying rent begins to feel like a bad investment and you want to build equity for the future, it’s time to figure out what loan you qualify for, says Bill Golden, a sales associate with ReMax Around Atlanta who has more than 30 years in the real estate business.
Golden says many renters are ready to buy a home once they are financially stable. Many are motivated by the pride of ownership and wanting more control over their dwelling place.
“If one or more of those is tugging at your heart, at least look into the possibility of owning rather than renting,” Golden says.
2. Your credit score has improved.
Some renters are locked out of homeownership because they can’t qualify for a mortgage. A low credit score is a common reason why renters can’t make the leap to purchasing a home. A history of late payments and too much debt will hurt your score.
One sign that you’re ready to buy a home is having a healthier credit score, says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C.
Although borrowers with a credit score as low as 500 can qualify for some home loans, they will be required to make bigger down payments and pay higher mortgage rates. A good credit score gets you better interest rates and loan terms.
Before you apply for a mortgage, get a free copy of your credit report.
3. You’re good at managing debt.
Another thing lenders look at when screening mortgage applicants is their debt-to-income ratio, or DTI. This is a key metric that’s calculated by adding up all monthly debts, then dividing the sum by your gross monthly income. The higher your DTI ratio, the more risk you pose to a lender.
Some conventional loans allow a DTI ratio of up to 50 percent, but many lenders prefer a ratio of no more than 43 percent. If you previously had a high DTI ratio and have since paid off some high balances, you’ll be in a stronger position to get a mortgage.
You’ll also have more wiggle room in your budget to put money into an emergency fund for home repairs.
4. You have enough set aside for the ext ra costs of owning a home.
When a pipe bursts or the air conditioner goes out in a rental unit, you don’t have to worry about paying for it; that’s the landlord’s responsibility. The same goes for property taxes, routine maintenance and homeowners insurance.
That’s not the case when you own a home. All those costs are your responsibility.
“Clearly, if you put everything you have into the down payment and such to buy a house, then you have no money to do repairs should they come up,” Golden says. “You’re better off spending less on the house so you have some money to make improvements and repairs.”
5. You can afford the down payment and closing costs.
“First-time homebuyers don’t have proceeds from another home to help fund the down payment. It’s one of the main reasons why the down payment is the biggest hurdle to homeownership,” says Rob Chrane, CEO of Atlanta-based DownPayment Resource, which finds programs that help people buy homes.
The down payment requirement depends on the type of home loan you get. For conventional loans, 20% down is usually required if you want to avoid paying private mortgage insurance, or PMI. Some mortgages insured by the Federal Housing Administration, known as FHA loans, require just 3.5% down. Fannie Mae and Freddie Mac back some mortgage products that require just 3% down; and loans guaranteed by the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture (USDA) require no down payment.
Renters interested in buying a home should compare different loan programs to see which one is best for them.
Another expense you have to be ready for is the closing costs, which typically equal 2% to 7% of the property’s sale price.
6. You’re ready to settle down in one place.
Buying a home involves a lot of upfront costs that can take a few years to recoup, so if you anticipate moving before you can recover those costs, homeownership might not be right for you.
No one works at the same company for decades anymore, but a renter who is ready to buy a house should have job security, says Hamrick. A stable job means stable income, which lowers the risk that you will stop making your mortgage payments and default on the loan.
7. You’re going through a major life change.
Many renters decide to purchase a home after a major life event, such as getting married, says Henry Yoshida, a certified financial planner and CEO of Rocket Dollar, a Texas-based provider of self-directed retirement accounts.
Marriage, a growing family, a new job and children leaving the nest are catalysts for people to buy a home.
8. You know what you want.
It’s smart to have a good idea of the area or neighborhood you want to live in and the type of home you want before you begin your quest. Houses, townhouses, condos, co-ops, duplexes — there are lots of options out there and each one has its own considerations for costs, upkeep and personal enjoyment.
If you buy a condo, for example, you don’t have to do the yardwork, but in addition to your mortgage, you must be able to afford the homeowners association fees.
Determine what you need and what is most important to you.
If you’ve moved to a new city or state to take a job, it might be a good idea to rent until you’ve familiarized yourself with the area.
Source: 8 signs you’re ready to stop renting and buy a home
No comments:
Post a Comment