If you have been thinking about buying your first home, making the leap from renting to owning requires some decision making. The perks of homeownership are both financial and emotional. Owning your own home is a big responsibility.
The timing of the decision to buy a first home is different for each of us.
If you are considering moving from renting to owning here are five questions you can ask yourself to determine if you are ready to own a home.
1. Am I financial ready to own a home?
Clearly, it takes a significant financial commitment to buy a home. The minimum down payment is typically 5% of the cost of the home you are buying. In addition you can add another 2 to 3 percent to cover the closing costs associated with buying a house.
Another important factor is you credit history. To qualify for a mortgage you should have as minimum a credit score of 620 but to obtain a competitive interest rate your credit score should be above 700. Credit is a privilege you earn by practicing good credit habits.
For many young buyers a big challenge is their debt-to-income ratio. Mortgage lenders demand borrowers have certain levels of monthly cash flow which means they carefully look at how much you are paying to other lenders, including student debt. How much you pay lenders each month is divided by your gross monthly income and the rule of thumb is this should be below 36 percent. A debt-to-income ratio of up to 40 to 43 percent may be considered acceptable by some lenders, but it really should not be over 33%. When preparing to apply for a mortgage you want to pay off or down your credit card balances.
2. Am I emotionally prepared to own a home?
Let's be honest, renting does not require much emotional thought. If the rent goes up, you can move. If something breaks you call the landlord. Owning a home is means you are "all in." When the kitchen sinks springs a leak, you have to fix it or find someone who can. If your home is part of a Home Owners Association and they increase the dues you have to deal with it. These kinds of situations can strain your mental and emotional capability, especially if you don’t have financial flexibility. Managing stress and having problem solving skills is important for first time home buyers.
3. Can I compromise when selecting my dream home?
This sounds silly, but more often than not first time buyers have a very strong mental picture of the home they want to buy and reality of the market is different. There are always compromises buyers must be prepared to make.