At some point in our lives, most of us will stop renting and become a homeowner. So, how does one know when it’s a good time to take that leap? Here’s how to know when it’s time to transition from renter to homeowner.
Rent Keeps Increasing
In some areas of the country, rents are rising. This can be frustrating because you can’t anticipate what your housing costs will be in the long-term, which can make it difficult to plan your finances.
When rent is going up, and mortgage rates are low, it can be a good sign that you should start shopping for a home. If you think about it – when you are renting you’re probably helping to pay someone’s mortgage. Unfortunately, that person isn’t you!
You’re Ready to Settle Down
While no one works at the same company for several decades anymore, a renter who is ready to buy a house should have a moderate expectation of job security. A stable job means stable income.
Buying a home involves a lot of upfront costs that can take a few years to recoup, so if you anticipate moving in a few years or don’t like to be tied down in one place, homeownership might not be right for you yet.
You Have a History of Managing Debt Well
Lenders look closely at the amount of debt you have and how you have managed that debt. Ideally, a lender wants you to have 43% or less debt-to-income ratio, although some conventional loans will allow you to have a 50% DTI.
You can calculate your debt to income easily by adding up all of your monthly debt payments. Once you know what your monthly debts cost, then you can divide that number by your gross monthly income.
You’ve Saved Up
You need to have enough money set aside for the extra costs of owning a home and for the mortgage loan down payment.
When a pipe bursts in a rental, you don’t have to worry about paying for it. Sames goes for ongoing maintenance and homeowner’s insurance. However, if you’ve been able to set aside savings, you could use the extra money to help with the added expenses of being a homeowner.
There is also the mortgage down payment to consider. There is usually a minimum down payment of 3.5% to 10% for an FHA home loan, and a minimum of 3% to 5% for a conventional home loan. You may also responsible for closing costs, which average about 2% to 5% of the sale price.
Your Credit Score is in Good Shape
Sometimes a low credit score, too much monthly debt or not enough savings are reasons why renters can’t make the leap to owning a home. You don’t need perfect credit to buy a house, but a higher credit score helps you qualify for a lower mortgage rate, saving you money in the long run.
Depending on the mortgage you choose, you’ll need a minimum credit score of 600 for approval. To qualify for the most favorable rate, however, wait until you have a score of 700 or higher.
You’ve Researched Your Loan Options
It’s important to understand the types of mortgages available before buying a home. Home loans range from conventional to government products; adjustable to fixed-rates; and 15-year to 30-year terms. Make sure to research your options fully before making any major financial decisions.