Homeownership: It’s the American Dream.
For many first-time homebuyers, the decision to make that dream come true revolves around life events like marriage, childbirth and career moves. For others, it might just be that desire to stop paying rent. Home equity sure sounds nice about now, right?
But before you hit the housing market on your own, there are many considerations to be made, such as discovering if you are financially and personally ready to take on such a responsibility.
Think you have the chops to tackle the biggest purchase of your life? Here are five signs you’re ready for homeownership — and a few of the first steps you can take to help make it happen.
1) You’re a Good Renter
If you have no trouble paying your rent on time, in addition to other bills like utilities, Internet and television, then you should have no trouble with paying a mortgage (as long as it’s in your monthly budget).
“One of the best predictors of being ready for homeownership is solid performance as a renter,” says Rick Sharga, executive vice president of Ten-X, an online real estate transaction marketplace. “Making timely, consistent rent payments suggests that someone is financially responsible enough to also make regular mortgage payments.”
While that may be true, it’s also important to understand the additional monthly costs associated with homeownership.
“It’s really important to understand that the cost of homeownership isn’t limited to principal and interest payments,” adds Sharga. “Borrowers also need to factor in state and local taxes, homeowner’s insurance, utilities, cable/satellite, homeowner association fees and maintenance.”
In addition, there are other upfront costs you may have to pay monthly. It’s important to take the proper steps to outline all these costs and budget accordingly.
2) You Have Job Security
The next clear sign is job security. If you love your job and don’t plan on leaving in the foreseeable future, now may be a great time to buy a home.
“Uncertainty will almost certainly ruin any prospects of buying a home,” says Than Merrill, CEO and founder of FortuneBuilders and former host of A&E’s Flip This House. “So before you make a 30-year commitment to mortgage premiums, make sure you are secure in your employment position.”
If not, it may be wiser to wait off for a while and build up your working portfolio. Once you’ve found the career and employer that you’re happy with, it may be time to reconsider homeownership.
3) You Know What You’re Looking For
Another sure sign that you’re ready to own a home is that you know what kind of home you’re looking for and that you’re looking in the right market.
“Now is the time to ask yourself what you’re looking for in a new home,” says Merrill. “Understanding what you want out of your first home will ultimately make the process that much easier.”
Ask yourself the following questions. If you know the answers, you just might be ready:
• What is most important to you and your family?
• How many bedrooms do you need? Does that accommodate for a growing family?
• What type of neighborhood are you looking for?
• How far away are you willing to commute to work?
“This is also the time to match what it is you are looking for with your predetermined budget,” adds Merrill. “At the very least, what you expect to spend should narrow things down a bit.”
Then, it’s time to start comparing those options to your market of interest. In certain markets, there may not be homes that match your criteria and budget. In others, there may be an overload of options.
“It all depends on the current state of the particular market you are interested in,” Merrill says. “So while interest rates are important, it is equally important to own in the right market.”
4) You Have Good Credit
The next step is to check your credit, which can be done for free at AnnualCreditReport.com.
“Another sign is having a strong credit score (a FICO score over 700) without carrying excessive debt,” says Sharga. “If a borrower’s lifestyle is only sustainable because he or she is running up huge credit card debt, they’re likely to get themselves into some financial trouble when they buy a home, which typically requires purchasing furniture, fixtures, appliances and other items.”
Your credit score will dramatically affect your ability to get a loan, your down payment and monthly mortgage payments.
“Few things impact your ability to buy a home more than your credit score,” says Merrill. “In fact, it can be argued that your credit score serves as the foundation for the entire homebuying process.”
While Sharga suggests a score of more than 700, the Federal Housing Administration suggests having a score of 580 or better, but those between 500 and 579 are limited to a 90-percent loan-to-value (LTV) ratio.
Your next steps? Check your score at least 12 months before buying a home. If you’re score isn’t quite where’d you’d like it to be, it might be best to delay homeownership while you build up your score.
5) You Understand the Buying Process
Finally, if you already understand the entire process of buying a new home, you’re on the right track.
If not, don’t worry. There are thousands of financial institutions and homebuying experts in the world who are there to help make it easy for you.
Below are a few key points to remember and research about the buying process:
• Find a trusted lender. One of the most important people you’ll work with in the buying process is your lender. They’re there to help you get preapproval for a mortgage loan and to help you understand the total costs of buying a home.
• The down payment. While it is not always required that you put 20 percent down, this rate is a good number to aim for to limit the costs of your loan, says Merrill. Still, there are many down payment assistance programs available when 20 percent is not an option.
• A savings plan. Develop this after you have determined how much you need to put down. The banks or credit unions in your area will want to see a history of stable funds in your account before you apply for a loan.
• Your debt-to-income ratio. The Consumer Finance Protection Bureau has established new lending rules that set a hard cap of a 43 percent debt-to-income ratio in order to qualify for a conventional mortgage. “As a rule of thumb, borrowers should probably aim for spending 28 to 33 percent of their net income on housing,” says Sharga.
• Cash reserve. Sharga adds that cash reserve, after accounting for the down payment, is another great sign of readiness. Having savings on-hand to cover about three to six months of living expenses and unexpected emergencies is another smart goal.
It’s never a good idea to jump into the homebuying process blind. After you’ve taken the time to speak with your builder, financial experts and advisors to fully understand the process, that’s when you truly know you’re ready for homeownership.