When is it time to buy your first home?
You’ve been treading the shallow end of tenant living but how do you know when it’s time to jump into the deep end of buying your first home? Buying a home is one of the largest financial decisions you’ll ever make, which can be overwhelming and confusing.
From knowing how much of a down payment you’ll need to understanding if your credit score is strong enough to qualify for a solid interest rate, buying a home requires a lot of understanding.
To help you understand if you and your financial future is ready to stop renting and start owning, begin by asking yourself these questions.
Does your budget allow you to save part of your income each month?
Homeownership removes your ability to call the landlord if a pipe bursts or the oven goes out. You are responsible for the massive cost of repairing a hot water heater or replacing an air conditioner. If your current budget allows you to save towards an emergency fund, you are in a much better place to think about homeownership. Business Insider recommends saving 1-4% of your home’s value for regular maintenance. Larger repairs or updates may be out of reach in your current budget. A Home Equity Line of Credit (HELOC) may be an option to help cover expenses if you have enough equity in your home. With a plan in place, an unexpected crisis can be handled without stress.
Are you paying all your bills on time, and are you paying down existing debt?
These two factors will play the most in determining your credit score. Your credit score should be in range to qualify for a competitive interest rate if you have a good debt-to-income ratio. If you are not current on bills or have debts that are delinquent, take six months to clean up those past debts or get current on all bills.
Then, revisit your credit score to see if you qualify for a better interest rate. If you are struggling to pay bills on time or can’t seem to pay off delinquent debts, it’s probably a good idea to wait until you are a bit more financially stable before investigating in a home loan.
Do you have money saved for upfront expenses?
You want to be prepared with at least about 3.5-5% of the purchase price of your home to use as a down payment. Some lenders offer a first-time buyer option that may offer a low-to-no down payment. However, depending on the mortgage lender, putting 20% or more down on a home loan can have some financial benefits like no private mortgage insurance (PMI) and lower interest rates.
On top of your down payment, it is important to add in the additional expenses of closing costs, home insurance, taxes and more. These expenses can add up and lower your purchasing budget if you’re not prepared.
If you are not quite there, keep saving until you have the percentage you want to put down on your home that you think you can afford. Sacrificing in the short-term could result in larger monthly payment in the long run.
Are you ready to settle down in a certain city?
You’ve heard the saying, “location is everything”. Well, that reigns true when it comes to making a big purchase like a home. Not only do you need to take into consideration the city you want to live in, but also the neighborhood. If you can see yourself living in your desired home for at least five years, it’s a good idea to think about buying it. If you are moving in the next year or two or three, stay in the rental game until you know where you’ll be long term.
Do you want to determine the paint colors, renovation projects and backyard patio options where you live?
Most landlords don’t want the tenants to do too much to alter the foundations to their rental space. You could spruce up the yard and add a deck or try your hand at tiling the kitchen floor, homeownership might be right for you. You have the option to personalize your room with fun paint colors or light fixtures. If you’re happy with leaving that to others, you could be a happy renter for a while longer.
If you answered yes to these questions, it could be time to talk to a financial advisor or mortgage lender about what you’ll need to do to get pre-qualified for a home loan.