Renting a place to live may give you the freedom to move when you want and relieve you of the responsibilities of homeownership, but at some point, most people yearn for their own home.
Buying a house is a good way to start building financial security. As you pay down the mortgage, you build up home equity, which is a valuable financial resource.
Mortgage rates are low right now, so if you think you’re ready to buy a home, it’s a good time to make the move. “For prospective and actual homebuyers, the decline in mortgage rates has provided a much-needed boost to housing affordability,” says Mark Hamrick, senior economic analyst for Bankrate. “This comes after home prices have risen steadily on a national basis since 2012.
“For those who were inclined to buy a home anyway, the drop in the cost of financing translates to a potential reduction in monthly mortgage payments. For those who weren’t initially intending to buy a home, the improvement in affordability might be what helps them to get off the proverbial fence.”
Deciding whether to rent or buy a home is a major decision. How do you know you’re ready? Here are eight signs that you’re ready to make the switch from renter to homeowner.
1. You’re tired of rising rent prices: Rental prices are on the rise nationwide, according to ApartmentGuide, which tracks trends in the rental market. The average rent on a one-bedroom unit climbed 4.2% in 2018, to $1,140; two-bedroom units rose to $1,354 and studio apartments rose 5% to $1,065.
Rising rent makes it harder to budget for monthly housing costs and to save for other financial goals. When paying rent begins to feel like a bad investment and you want to build equity for the future, it’s time to figure out what loan you qualify for, says Bill Golden, a sales associate with RE/MAX Around Atlanta who has more than 30 years in the real estate business.
Golden says many renters are ready to buy a home once they are financially stable. Many are motivated by the pride of ownership and wanting more control over their dwelling place.
“If one or more of those is tugging at your heart, at least look into the possibility of owning rather than renting,” Golden says. “If you’ve seen your rent escalate significantly but you feel trapped renting, it means the balance may be tipping toward buying. With today’s escalating rental rates and low (mortgage) interest rates, chances are your monthly outlay could be less on a purchase than on a rental.”
2. Your credit score has improved. Some renters are locked out of homeownership because they can’t qualify for a mortgage. A low credit score is a common reason why renters can’t make the leap to purchasing a home. A history of late payments and too much debt will hurt your score.
One sign that you’re ready to buy a home is having a healthier credit score, says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling in Washington, D.C.
Although borrowers with a credit score as low as 500 can qualify for some home loans, they will be required to make bigger down payments and pay higher mortgage rates. A good credit score gets you better interest rates and loan terms.
“Establishing a credit history or recovering from a credit setback can take time, but the goal of homeownership is still realistic under those circumstances,” McClary says. “Receiving help from a nonprofit housing counseling agency that also offers credit counseling programs can make a big difference for anyone struggling with those barriers to homeownership.”
Before you apply for a mortgage, get a free copy of your credit report.
3. You’re good at managing debt. Another thing lenders look at when screening mortgage applicants is their debt-to-income ratio, or DTI. This is a key metric that’s calculated by adding up all monthly debts, then dividing the sum by your gross monthly income. The higher your DTI ratio, the more risk you pose to a lender.
Some conventional loans allow a DTI ratio of up to 50%, but many lenders prefer a ratio of no more than 43%. If you previously had a high DTI ratio and have since paid off some high balances, you’ll be in a stronger position to get a mortgage.
You’ll also have more wiggle room in your budget to put money into an emergency fund for home repairs and other unexpected expenses.
“Keeping credit card balances low and debt under control is beneficial in many ways,” McClary says. “It’s important to consider that keeping credit card balances at or below 30% of the available credit limit has a positive influence on the credit score.”
Use Bankrate’s DTI calculator to figure out your debt-to-income ratio.
4. You have enough set aside for the extra costs of owning a home. When a pipe bursts or the air conditioner goes out in a rental unit, you don’t have to worry about paying for it; that’s the landlord’s responsibility. The same goes for property taxes, routine maintenance and homeowners insurance.
That’s not the case when you own a home. All those costs are your responsibility. If your income has risen or you’ve been able to set aside savings, you might realize you have enough extra money to handle the added expenses of homeownership.
“Clearly, if you put everything you have into the down payment and such to buy a house, then you have no money to do repairs should they come up,” Golden says. “You’re better off spending less on the house so you have some money to make improvements and repairs.”
5. You can afford the down payment and closing costs. “First-time homebuyers don’t have proceeds from another home to help fund the down payment. It’s one of the main reasons why the down payment is the biggest hurdle to homeownership,” says Rob Chrane, CEO of Atlanta-based DownPayment Resource, which finds programs that help people buy homes.
The down payment requirement depends on the type of home loan you get. For conventional loans, 20% down is usually required if you want to avoid paying private mortgage insurance, or PMI. Some mortgages insured by the Federal Housing Administration, known as FHA loans, require just 3.5% down. Fannie Mae and Freddie Mac back some mortgage products that require just 3% down; and loans guaranteed by the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture (USDA) require no down payment.
Renters interested in buying a home should compare different loan programs to see which one is best for them. In addition, there are grants and programs to help homebuyers with down payments. There is a wide range of programs for homebuyers today – more than 2,500 homeownership programs across the country administered by federal, state, county or local government agencies, nonprofits and employers.
Another expense you have to be ready for is the closing costs, which typically equal 2% to 7% of the property’s sale price. The good news is that some closing costs are negotiable.
“Because the buyers are putting so much of what they have into the down payment, we usually try to get a seller to pay some, if not all, of the closing costs,” Golden says. “Even if (the buyers) have to pay a little more for the house, it doesn’t hurt their pocket as much.”
6. You’re ready to settle down in one place. Buying a home involves a lot of upfront costs that can take a few years to recoup, so if you anticipate moving before you can recover those costs, homeownership might not be right for you.
No one works at the same company for decades anymore, but a renter who is ready to buy a house should have job security, says Hamrick. A stable job means stable income, which lowers the risk that you will stop making your mortgage payments and default on the loan.
“For two-income households, obviously the risk and opportunity are twice that of situations where there’s just one wage earner,” Hamrick says. “In a perfect world, (buyers) would buy a home well beneath their means so they aren’t devoting so much of their income to the mortgage and other related costs.”
7. You’re going through a major life change. Many renters decide to purchase a home after a major life event, such as getting married, says Henry Yoshida, a certified financial planner and CEO of Rocket Dollar, a Texas-based provider of self-directed retirement accounts.
Marriage, a growing family, a new job and children leaving the nest are catalysts for people to buy a home.
“The four major cities in my home state, Texas, are simultaneously on top 10 lists for raising a family and retiring, so I see this firsthand,” Yoshida says. “My own neighbors on either side are retirees from California and a young family who relocated from the Northeast for a job.”
8. You know what you want. It’s smart to have a good idea of the area or neighborhood you want to live in and the type of home you want before you begin your quest. Houses, townhouses, condos, co-ops, duplexes – there are lots of options out there and each one has its own considerations for costs, upkeep and personal enjoyment.
If you buy a condo, for example, you don’t have to do the yardwork, but in addition to your mortgage, you must be able to afford the homeowners association fees.
Determine what you need and what is most important to you. Is it being near a good school or within walking distance of your job? Do you mind navigating stairs or having neighbors live above you? Do you want lots of amenities?
If you’ve moved to a new city or state to take a job, it might be a good idea to rent until you’ve familiarized yourself with the area. That way, you are more likely to choose a home and neighborhood you feel good about.
Ready to leave renting behind? Here’s what to do next
Before you start looking at homes for sale, shop around, compare lenders and get preapproved for a mortgage. Getting preapproved helps you know how much house you can afford, what loan program is best for your situation and what price range to focus on so you don’t overextend your budget, says Ben Creamer, principal and managing broker of Downtown Apartment Co. in Chicago.
“This sets a realistic expectation for what the buyer is qualified to purchase, as well as what financial resources will be needed for closing,” Creamer says. “Knowing this upfront allows sufficient time to save and test the budget constraints.”
Choose a fixed-rate loan for 15 or 30 years if you want predictable, stable mortgage payments. However, don’t forget that owning a home involves a lot more than the monthly principal and interest payments for a mortgage. Property taxes and homeowners insurance are additional expenses that can increase your monthly payments over time, as is PMI if your down payment was too low. Then there are repairs, maintenance and utility costs to budget for, too.
As you weigh the decision to buy a home, make sure you can reach your other financial goals, Hamrick says. A new mortgage shouldn’t prevent you from paying down student loans and credit cards or from saving for retirement.
“In order for (buyers) to have a good chance of achieving a range of financial objectives, they should also have emergency savings,” Hamrick says. “That’s because of the inevitable expenses associated with homeownership.”
©2019 Bankrate.com, Ellen Chang. Distributed by Tribune Content Agency, LLC.