For many Americans, homeownership is a major goal in life. While many may be content renting into the foreseeable future, many others hope to one day have their name on title of a property they can call their own.
If you’re currently renting and are contemplating buying some time soon, there are a few questions you should ask yourself first.
Are You Emotionally Ready For the Responsibility?
Before you even consider the possibility of moving onto homeownership, make sure you’re emotionally prepared for it. Buying a home is a big deal and a huge financial investment. Unlike renting, you can’t just end your lease, pack up your things and go when you feel the need for a change on a whim.
The responsibilities that come with homeownership are lengthy, which is why it’s critical for you to do a lot of thinking and meditate on the subject before you make the move.
Do You Have a Reliable Job and Steady Income?
You might be making some good money right now that would help support a mortgage, but how steady and reliable is your job? While most careers are never entirely guaranteed forever, some employment statuses are much more secure than others. For instance, if you’re only on contract with an employer and are not an actual full-time employee, you could be without work once your contract comes to an end and your employer decides not to renew it.
The same goes for your income. Is it steady, or does it have a tendency to fluctuate in either direction? Ideally, your income should be predictable into the future. That way you can better assess whether or not you’ll be able to comfortably make your mortgage payments well into the future.
Is Your Credit Score Healthy?
Your mortgage lender will look at a number of things before deciding to approve you for a home loan, and one of them is your credit score. Unfortunately, many homebuyer hopefuls have no idea what their credit scores are, and wind up disappointed when their lenders deny them for a mortgage because of a low score.
Any credit mistakes that you’ve made in the recent past – such as missing payment deadlines or not making payments in full – can pull your score down and inevitably make it hard for you to get approved for a mortgage.
Before you decide to buy a home, get a copy of your credit report from one of the three credit bureaus – Equifax, Experian, and TransUnion – which you are allowed to get for free once every 12 months without affecting your rating. Check it over to see if there are any mistakes. If you spot any, you can dispute them. Even cleaning up one mistake can add a few ticks to your score, which can really help.
Make sure you’re on top of the game and are responsible for your debt, as this will show lenders that you’re competent and qualified enough to make good on your mortgage payments should you be approved.
Do You Have Enough Money For a Down Payment?
The more you can put towards your home loan in the form of a down payment, the less you’ll have to borrow and the higher the odds of mortgage approval. These days, you’ll need at least 5% down for a conventional mortgage, and usually around 3% for a government-backed mortgage (though there are some programs that accept even less).
Having said that, the ideal down payment is one that is a minimum of 20% of the purchase price of the home, as this will help you avoid having to pay Private Mortgage Insurance (PMI), which can cost you anywhere between 0.5% to 1% of the loan amount paid on an annual basis.
If you’ve got a $300,000 mortgage, for instance, you’ll be paying $250 a month in PMI payments. You can avoid this cost by coming up with 20% down. Not only that, you’ll be able to borrow less to finance the home, which means smaller monthly payments (and less money going towards interest).
Can Your Income Handle All the Extras of Owning and Maintaining a Home?
Aside from a down payment, there are plenty of other expenses that go into buying and owning a home. There are a bunch of closing costs that you will have to pay for, including lender fees, appraisals, land transfer taxes, title insurance, and so forth. Typically, buyers pay anywhere between 1% to 4% of the purchase price of the home right off the bat.
In addition, there are maintenance fees that you will have to pay for that you may not have had to cover as a renter. Maintaining your landscaping, paying your utility bills, property insurance, property taxes, and covering the cost of ongoing repairs that will certainly come up throughout the lifespan of your home are just a few of the things that you will be responsible for.
This can add up to a few thousand dollars every year, depending on your location and the size and condition of your home. Make sure you get an idea of these costs from the seller before you dedicate yourself to a specific home.
Are Prepared to Handle All the Maintenance Yourself?
Not only will you be responsible for covering the cost of maintenance and repairs, you’ll also be on the hook for tackling them yourself. You’ll need to dedicate a little time each week or month to home maintenance. If you’re not a handy person or simply don’t have the time nor the desire to handle these tasks yourself, you’ll need to hire someone to do it for you, which means more money out of your pocket.
Have You Found an Area You Can See Yourself Living in Long-Term?
As a renter, you have the freedom and flexibility to move as you please after your lease term is up. Such is not exactly the case with homeownership. Relocating is a much more in-depth and expensive process when you actually own a property and need to sell it to move.
That said, if you’ve found a location that you love and can see yourself calling it home for the long term, then buying may be a great decision. This is especially true if your job is secure and has a very low likelihood of changing anytime soon.
Of course, you’ll want to investigate the neighborhood you’re considering calling home by scoping out its school system, crime rate, proximity to work, amenities, and property values, to name a few. Your real estate agent can help you gather this pertinent information about the area.
The Bottom Line
There are so many milestones in life to celebrate, and that includes entering homeownership. Of course, achieving this status can and should only be done if you are both emotionally and financially ready to take the plunge. Ask yourself the above questions before you make the leap from renter to homeowner to ensure you’re ready to take the next step.