Are You Ready For Home Ownership?
May 12, 2020
When considering if home ownership is the next right step for you, there are many things to keep in mind. It’s not just about what you can afford, but also the lifestyle you live and where you see yourself 5, 10, 15 years down the road. As you read through this article take some time to apply your specific situation to the questions below. Your results should be able to give you some clarity on if home ownership really is in your best interest at this time.
What’s your numbers? There are some key numbers and equations to understand when considering purchasing a home. One you are probably familiar with is the credit score. A credit score can be thought of as a financial report card. It grades you on your responsibility with managing loans and other financial obligations. When home-buying, you need to have a minimum credit score of 640 or higher. In terms of a report card a credit score of:
- 600-640 would be a D
- 641-670 would be a C,
- 671-739 would be a B
- 740+ would be an A.
The higher your credit score the more confident you and lenders will feel about your financial security.
Another important question to ask yourself is can you afford the house you want/need? To answer this question, you should consider two ratios. The first is known as the debt-to-income ratio. This ratio compares monthly debt payments (including the potential mortgage payment) to monthly gross income (income generated before taxes). Complete the following steps to determine your DTI.
- Add all debt paid in a month, this includes student loans, credit card payments, car payments, etc.
- Determine your monthly income
- Divide Debt/Income. This will generate a decimal number.
- Multiply by 100 and you now have your debt -to -income ratio.
Ideally, you would like this number to be 36% or less. If this number is over 50% then it is very unlikely any financial institution will lend to you and you are not in a position to purchase a home with those monthly payments. The second ratio to consider is the “front end” debt-to-income ratio. Unlike the first ratio we discussed this ratio focuses only on expenses associated with purchasing and owning a home such as mortgage payments and insurance. Again, divide the debt by gross income and multiply by 100. Experts say mortgage payments should be no more than 28% of monthly income. If your number is higher than 28% you need to reconsider the price of the home you can afford.
Lastly, consider the amounts you have saved currently. 20 years ago, a down payment of 20% or more was required, now a days it is far less and can be as little as 0% with a VA or USDA loan. Even if you don’t have access to those types of loans, a conventional loan can go as little as 3% down and FHA (Federal Housing Administration) loan can go to 3.5% down. This decrease in required down payment comes with its' own benefits and disadvantages. True, it makes homeownership more feasible for everyday Americans, but it will also increase the amount of interest paid over time. You should contribute a substantial amount to the down payment of your home, but not so much as to wipe out your entire savings. Be sure to have a down payment that is in excess to your emergency fund. After down-payments and closing expenses are paid your savings should still contain enough money to support your household’s living expenses for 3-6 months.
Now that we have discussed the factors determining your affordability of a home, it is important to have a moment of introspection. Ask yourself if home ownership is compatible with where you are in life currently and where you see yourself in the future. After all, buying a home is a long-term investment. Do you have a stable income and job? Most lenders like to see a consistent employment record dating back at least 2 years. If you have not been employed in your current profession very long or do not have plans to stay in the profession you should consider how that may affect your ability to qualify for a mortgage and make payments in the future.
How long do you see yourself living in your current city/town? When you purchase a home, the initial mortgage payments made over the first few years often contribute very little to the principle of the loan. Most of the payment will instead go toward interest. This means that only a small amount of equity is being created. If you do not intend to own the home for a minimum of 5 years, there is a possibility that you will lose money on the sale of your home. In fact, most experts recommend owning a home for closer to 10 years before considering selling.
Home ownership comes with much more responsibility than renting. From landscaping and utilities to appliance maintenance and replacements, these things can be time-consuming and costly. If you enjoy the convenience and freedom of a third party handling these aspects, renting might be a more favorable option for you.
If you have calculated the ratios and weighed through the pros and cons of buying a home and do believe you are ready and willing to purchase, there are still a few more things to consider if now is the time for you. Look at your current external financial surroundings. If interest rates are currently low and trending upward that may be a sign to purchase a home sooner rather than later. Look at the real estate market as well. Is it a “buyer’s market” in your area or a “seller’s market”? In a buyer’s market supply for real estate is high and demand for real estate is low. This means that as a buyer you have more negotiating power when it comes to price due to some sellers being desperate to sell. If you can negotiate a lower purchasing price, this increases the chance of the home appreciating in value in the future and making you money when/if deciding to sell. Lastly, consider the time of year. Experts say there is generally more inventory in the spring, due to families wanting to move at the end of the school year. In the winter, less people are buying which may encourage sellers to accept lower offers than normally would.
Hopefully you have taken the time to consider the questions above and it has brought some clarity to your home buying process. Purchasing a home is a financial and personal decision. The question is not only can I afford a home but is my current lifestyle best suited for a home. For more information on home-buying call SunMark Community Banks Mortgage Department at (478) 953-4490 or follow the link below.