How do you know if you are ready to buy a home?
If you are considering purchasing your first home, it can be difficult to know determine when the “right time” is to go from renting to owning. Buying a home needs to align with your life goals, but you also need to make sure that you are prepared financially. By asking yourself the questions below, you can begin to determine if purchasing your first home is something that makes sense for you to consider right now. I know it can seem overwhelming, but let’s walk through it all together!
620 is the minimum required credit score for most home loans. While some lenders and loan programs may allow for lower, aiming for at least 620 is a great goal. The higher your credit score, the better your interest will be and the more loan programs you will have access to. Do you have any credit card debt that can be paid down? Are there any derogatory marks on your credit report that may not be reporting accurately? If you aren’t sure how to evaluate your credit or what you may need to do to boost your score, an experienced loan officer can definitely help you in the right direction.
With a strong credit profile, most loan programs will allow you to carry a debt loan up to 45-50% of your gross monthly income – this is called your debt-to-income (DTI) ratio. What gets factored into your DTI ratio is most debts that report on your credit report along with your new mortgage payment. For example, if you make $10,000 per month before taxes and you have $1,000 per month in auto loans, student loans, and minimum credit card payments, the maximum mortgage payment you will qualify for will likely be around $4,000 per month. The $4,000 mortgage plus the $1,000 per month in other expenses puts you at a 50% DTI ratio.
Assets essentially means funds that you will be using for your down payment and closing costs. Outside of a VA loan for veterans which typically does not require any down payment, the minimum down payment amount for most loans is going to be between 3-5%. There is a common misconception that 20% down is needed for a conventional loan, but most of the time this is not true – even if you have owned a home before! Closing costs and prepaid taxes and insurance typically run another 2-3% of the sales price, so in total you should plan to have between 5-8% of the price of the home in assets that you are willing to use to purchase the home. Assets can be your own funds (checking, savings, retirement funds) or they can come in the form of “gifted funds” from a relative as long as the home you are purchasing will be your primary or secondary residence.
One of the most important things to consider when purchasing a home is the total monthly payment including property taxes and insurance. While real estate tends to appreciate in value over time, try to think of any increase in value as a bonus and not the main goal. One of your primary objectives in purchasing a home is securing a stable monthly housing payment that doesn’t increase 5-10% per year as rent often does. Before you consider buying, you will want to ask yourself, “Is this monthly payment something I am comfortable paying for the foreseeable future regardless of any external circumstances?” I also tell my clients to never rely on refinancing to lower your payment in the future. If rates take a dip and it makes sense to refinance down the road, then great! But the payment that you take on when you purchase your home should be one you are comfortable with as is.
Do you plan on moving within the next few years? If so, it may be a better idea to continue renting until you move to an area that you plan to be in for 5+ years. On the contrary, even if you plan to move within a few years, you could buy a home and keep it as a rental property when you move. So if you are interested in being a landlord/real estate investor, it may not be a bad idea to buy a home even if you are likely to move in the semi-near future! However, if you aren’t interested in acquiring rental properties, you may want to wait until you have moved to a more permanent location.
Finally, and possibly most importantly, do you want the responsibility that comes with being a homeowner? Owning a home is incredibly rewarding but doesn’t come without work. Landscaping, repair and maintenance, cleaning, weatherproofing, and pest control are just a few of duties that come with owning a home (and sometimes come with renting, too). Before you buy, make sure that you are either up for these tasks yourself or are prepared to pay for some professional help.
In conclusion, the decision on whether to rent or buy comes down to you. Your goals, your lifestyle, and your priorities. For example, renting provides more flexibility than owning. If you think you may need to relocate for work, renting may be the better decision. Renting also generally does not have the same acquisition cost as buying does, as there is a security deposit but there is no down payment or required funds for closing costs. On the flip side, however, renting has no tax benefits and doesn’t build equity. When you own a home, you build equity over time by your home’s value increasing and your loan balance decreasing as you pay down the mortgage.
There is no right or wrong answer, but if you are relatively stable in your career, don’t plan to move for the foreseeable future, and you meet all of the requirements outlined above, getting pre-approved to purchase a home is something that you should strongly consider! If you’d like our help in getting pre-approved, feel free to complete our user-friendly online application here. Not quite ready to get pre-approved, but want to chat through your situation and options? No problem! Click here to schedule a free 15-minute call with our broker/owner, Dan Patty or email us at TeamDan@solcostahomeloans.com. Whether you are ready to buy a home right now, in three months, or in three years, we look forward to serving you!