There’s a reason why most people associate home ownership with settling down. Purchasing a home often indicates that your life is steady, your career is secure, and you are likely married or in a significant relationship. If you’ve reached this point in your life, it indicates you’ve decided what you want out of life. Ideally, it also indicates that your finances are in order.
However, as much as you want to quit renting and start owning, the home-buying process is not for the faint of heart. Aside from that, house ownership comes with a slew of possible issues and costs that renters are unlikely to face. A home is also the most expensive investment most individuals make in their lives – are you prepared to make that type of commitment? In this article you’ll learn how to determine if you’re ready to buy a home.
Do You Have Financial Security?
Before you start binge-watching HGTV and collecting paint samples, consider the following: Do you have a rainy-day fund? If that’s the case then how many months could you afford to cover your ongoing expenses? An emergency fund pays your expenditures if you lose your job, require surgery, or must fly to a family member’s funeral. It’s an important first step towards financial security.
You won’t miss a mortgage payment because you can’t work if you have a well-stocked emergency fund. It is your last line of protection against losing your house due to events beyond your control. If you don’t have three to six months’ worth of spending in a savings account you should work on that before purchasing a home.
The next thing to think about is whether or not you have debt and how much you owe. You won’t be able to get a mortgage if you have too much debt. Lenders look at your debt-to-income ratio to see if you have enough money to pay them back every month. Do you know what your debt-to-income ratio is? You can calculate it by dividing the money you owe by the money you bring in every month. Ideally, this ratio should be as low as possible.
Owning a home is probably the right choice for you if your employment is consistent, you have enough funds, and you have low debt. If you’re still battling with money problems, prioritize tightening up your finances and adopting a more frugal lifestyle.
How Long Do You Plan On Staying in the Area?
When purchasing a property, you must pay many upfront expenses, including appraisal fees, inspection charges, and loan origination fees. These costs are likely to be in the thousands of dollars, if not more. This indicates that in order to break even you must stay in the home for at least five to seven years. If you sell your house before that time, the value may not have increased sufficiently to satisfy closing expenses.
Buying a property makes little sense if you need to move around for work. Your employer may transfer you to another place, leaving you to deal with your changing living situations.
Let’s take a look at one probable scenario: You purchase a property in March, and your employer informs you in November that the branch is closing and you will be relocated to another city. You may either refuse and look for a new job in your area or you can accept the offer.
Because you enjoy working at your job you accept the company’s offer. But now you have two weeks before your transfer, leaving you with little time to sell your house. Because the date is so near to Thanksgiving, there aren’t many people interested in your listing. In the end, it takes two months for your property to sell during which time you must pay both your mortgage and your new rent.
This type of scenario is more common than you may believe and it demonstrates why home ownership isn’t always the greatest option – even if you can afford it.
Are You Prepared to Buy a House?
On the surface, home ownership appears simple, but the reality is far from that of a Home Depot ad. If you’ve lived in a rental home your entire life, you’ve always had a landlord to contact when there’s a problem with the property. You’ve never had to deal with leaking pipes or replacing a broken air conditioner. As a homeowner, you are ultimately responsible.
According to experts, you should set aside 1% of the home’s purchase price for repairs each year, or $1 per square foot. This will cover both small issues, such as touch up paint for your doors, and big issues, such as a roof replacement.
It is not only costly but also time-consuming to repair your home when something goes wrong. Instead of phoning the landlord and delegating this duty, it will be your obligation to select a contractor, obtain several quotes, and take time from work to address the issue. Not to mention the added stress of dealing with it all.
If your budget does not allow for an extra couple hundred dollars per month for repairs, or if you do not want to deal with home maintenance at all, you are probably not ready to buy a home just yet. In fact, some people prefer to rent their whole lives, devoting the money they would have spent on a house to other assets. There is no law that says you must buy a home in order to be financially stable.
What Kind of House Do You Want to Own?
Before you begin looking for a home, you should determine what you genuinely want in a house. It’s easy to say, “I’ll know it when I see it,” but such an approach frequently results in a long, drawn-out search. When you’re ready to buy a home, you’re also ready to make a plan and get specific.
The fundamental questions are straightforward:
- How many bedrooms you want?
- What neighborhoods do you want to choose?
- What type of yard suits your lifestyle best?
Then things get a little more complex:
- Do you need to live near your workplace or do you not mind commuting?
- Do you have children, and if so, do you need to purchase a home in a certain school district?
- Do you have a preference for a certain architectural style?
If you’re married or in a committed relationship, talk to your spouse about the type of house they want. Consider if this is going to be your starter home or your ideal home. The answer to that question will help you narrow down your search.
Are You Able to Save for a Down Payment?
When you apply for a mortgage, you must make a down payment that serves as a deposit. The down payment provides you with immediate equity in the property you’re about to purchase and demonstrates to the mortgage lender that you are capable of saving.
A down payment of at least 3-5 percent is required for a conventional loan and 3.5 percent for an FHA loan. In addition to the down payment you must pay the loan’s closing charges, which are typically 2-5 percent of the purchasing price. When you apply for a mortgage, the funds must be in your bank account. A loan from your parents or anybody else cannot be used as a down payment since the lender would consider it debt.
If you can’t afford to save for a down payment, you’re unlikely to qualify for a mortgage. Some loans, such as VA or USDA loans, allow consumers to purchase a home with no money down. There are also several first-time home buyer programs available to assist people in saving for a down payment, so look into those if you’re having difficulty.
What Is Your Credit Rating?
A good credit score is required for purchasing a home and being accepted for a mortgage. A typical loan requires a minimum credit score of 620. However, some lenders want a score of 700 or higher. FHA loans require a credit score of at least 580. If you have a low credit score, a debt that is actively being collected, or a recent bankruptcy, you may not be able to apply at all.
Check your credit report at AnnualCreditReport.com before attending an open house or signing up for Zillow alerts. The report will list your whole credit history and will highlight any red flags, such as late payments or overdrawn accounts.
If your score is less than 700, consider what could be causing it to fall:
- Do you use more than 25% of your credit card limit each month? Even if you’re staying well below your maximum allowed credit amount, anything above 25% may negatively impact your credit score.
- Did you have a lot of hard inquiries recently?
- Is your credit history not long enough yet?
A good credit score will also help you secure a reduced interest rate on your mortgage. Locking in a low interest rate now will save you hundreds, if not millions, of dollars over the life of the loan.
Buying a house is one of the most significant financial choices you will ever make. For that reason, you need to make sure it’s the right one. Don’t do anything just because all your friends are doing it don’t let your parents convince you of something, when you still feel unsure about it. If you ask yourself these questions, you’ll be able to tell when the timing is appropriate. Until then, enjoy the stress-free life of a being a renter for a little while longer.