Maybe the rent has gone up again. Or you’re just tired of paying someone else’s mortgage and think it’s time to own your home.
Whether or not you’re ready to buy has a lot to do with your financial readiness. That’s a given, but there are other factors to consider when thinking about stepping into the world of first time homebuying.
Let’s take a look at both by asking the 7 questions that help determine you’re ready for first time homeownership.
Whether or not you’re ready to buy has a lot to do with your financial readiness. That’s a given, but there are other factors to consider when thinking about stepping into the world of first time homebuying.
Let’s take a look at both by asking the 7 questions that help determine you’re ready for first time homeownership.
Do you have a stable income?
That may seem obvious but with the economic impact of the COVID-19 virus, it’s important to feel you have some job security. Plus, you’ll need to show a history of stable past employment.
You’ll need:
You’ll need:
- Proof of Income--At least 2 years of tax returns or pay stubs.
- Proof of Down Payment—You’ll want to show your lender you have the money for the down payment. That money must be deposited into your bank account at least 60 days prior to your mortgage application. So, if you’re receiving monetary gifts from family to purchase a home, make sure the money is in your account well before you make an application for a mortgage.
- Self-Employed? That can be more challenging to get a mortgage, especially if your income isn’t always steady, but it is doable. You’ll need at least two years of bank statements that verify your earnings. We went in depth on how to get a mortgage if you’re self-employed in this post.
How comfortable are you managing debt?
First time homebuyers who are comfortable managing debt—and managing their credit wisely—are more likely to get favorable terms on a home loan.
All of these greatly influence your credit score. In fact, the higher your score, the less risky you appear to a lender. That means, in turn, you will qualify for a lower interest rate.
According to FICO, a good credit score is 700. To be eligible for even better interest rates, you’ll need a score of 740+.
Another financial aspect in buying a home is your debt-to-income ratio or DTI. This ratio compares your total monthly debts which also includes your new mortgage to determine your ability to repay the mortgage.
The sweet spot for DTI is 28%. The lower your debt-to-income ratio, the more comfortable you’re going to feel making a mortgage payment.
Conversely, a high DTI can increase your interest rate and limit how much money you can borrow. You can check your DTI with this Debt-to-Income Ratio Calculator
- Paying monthly utility bills on time
- Paying credit cards on time or ahead of the scheduled payment date
- Paying any personal loans on time or paying them off early
All of these greatly influence your credit score. In fact, the higher your score, the less risky you appear to a lender. That means, in turn, you will qualify for a lower interest rate.
According to FICO, a good credit score is 700. To be eligible for even better interest rates, you’ll need a score of 740+.
Another financial aspect in buying a home is your debt-to-income ratio or DTI. This ratio compares your total monthly debts which also includes your new mortgage to determine your ability to repay the mortgage.
The sweet spot for DTI is 28%. The lower your debt-to-income ratio, the more comfortable you’re going to feel making a mortgage payment.
Conversely, a high DTI can increase your interest rate and limit how much money you can borrow. You can check your DTI with this Debt-to-Income Ratio Calculator
Do want to stay in the same area for a long time
Owning a home is a long term investment. So before you take the plunge into homeownership, have a clear idea of your path forward.
Remember, closing costs average between 3%-4% of the home’s selling price. If you’re not planning to stay in the area for a few years, it may not make sense to buy.
Check out this rent vs. buy calculator to compare the cost of buying a home and renting.
- Do you plan to stay in the same are for at least five years?
- Do you plan to raise a family?
- Do you plan to buy a home and stay in it until retirement?
- Will your job keep you in the area for two to four years?
Remember, closing costs average between 3%-4% of the home’s selling price. If you’re not planning to stay in the area for a few years, it may not make sense to buy.
Check out this rent vs. buy calculator to compare the cost of buying a home and renting.
Do you know what your house hunting budget is
This is the key to buying wisely, knowing how much house you can afford! We’re not just talking about the mortgage but also closing costs, taxes, and insurance.
Most financial experts recommend the 28/36 rule. You should spend 28% of your gross monthly income on your mortgage payments and 36% on your total debt.
Most financial experts recommend the 28/36 rule. You should spend 28% of your gross monthly income on your mortgage payments and 36% on your total debt.
Do you have enough cash for a down payment and closing costs?
It’s not true that you need 20% down to purchase a home. There are various government-backed loans that require far less down. Specifically, VHDA, the Virginia Housing and Development Authority, was created to assist first time homebuyers.
If you live outside of Virginia, check with your state to see what’s available.
Do keep in mind that if you do have less than 20% down, you will have to pay private mortgage insurance.PMI is insurance protection for the lender in case you default on the loan.
Once you have paid the equivalent of 20% equity on your home, your lender will remove the PMI.
If you live outside of Virginia, check with your state to see what’s available.
Do keep in mind that if you do have less than 20% down, you will have to pay private mortgage insurance.PMI is insurance protection for the lender in case you default on the loan.
Once you have paid the equivalent of 20% equity on your home, your lender will remove the PMI.
Are you ready for the responsibility of owning a home
Buying a home isn’t just about affording a mortgage although that’s a huge part of it. There are other aspects to homeownership you may not have considered.
It’s important to understand that as a first time homeowner, you may have to make some sacrifices. Are you ready for that?
In short, knowing what your priorities are make your decision easier!
- Property taxes
- Maintenance and repairs
- Insurance
- Your financial goals
- Your lifestyle
- Is it important to you to eat out every weekend?
- Will having a mortgage to continue doing the fun things you enjoy?
- Does homeownership fit into your future plans such as starting a family or starting a business?
It’s important to understand that as a first time homeowner, you may have to make some sacrifices. Are you ready for that?
In short, knowing what your priorities are make your decision easier!
Do you have a rainy day fund?
Last but certainly not least, do you have enough savings in case something unexpected arises? Financial experts recommend having enough savings to live on for three to six months.
With homeowners spending an average of $3,192 on maintenance and $1640 on emergency repairs, according to HomeAdvisor, it makes sense to set aside between 1%-4% of your home’s value for emergencies.
If your home is older, you may want to set aside a bit more.
With homeowners spending an average of $3,192 on maintenance and $1640 on emergency repairs, according to HomeAdvisor, it makes sense to set aside between 1%-4% of your home’s value for emergencies.
If your home is older, you may want to set aside a bit more.
Conclusion
Deciding to become a homeowner is a big step and deserves serious consideration. If you’re uncomfortable or simply don’t want to cut out activities or the lifestyle you currently enjoy, then first time homebuying may not be right for you now.
But for the right person and the right circumstances, stepping into homeownership is a dream come true!
When you’re ready to settle on your new home, turn to Lilly Title & Settlement. Our expert attention to detail and professionalism has earned us the trust of buyers just like you.
We also encourage you to consider investing in homeowner’s title insurance to protect your investment for as long as you own your home. Learn more about it here.
But for the right person and the right circumstances, stepping into homeownership is a dream come true!
When you’re ready to settle on your new home, turn to Lilly Title & Settlement. Our expert attention to detail and professionalism has earned us the trust of buyers just like you.
We also encourage you to consider investing in homeowner’s title insurance to protect your investment for as long as you own your home. Learn more about it here.
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