At some point in our lives, most of us will stop renting and become a homeowner. The question is, how does one know when it is a good time to take that leap? If you have recently been thinking about buying a home, here are the four signs you are ready to stop renting and own a home.
You have been at your job for a while.
One of the keys to being able to buy a home is having steady employment. Mortgage companies use your employment history as an indicator that you will likely continue to have the funds to pay them back. Traditionally, they look to see that you have at least two years at the same company before granting approval. If you are self-employed, don't worry. In your case, your last two years' tax returns will be used to verify you have a steady source of income.
You have got a handle on your debt.
Notice I did not say debt-free? Between student loans, car payments, and credit card debt, most loan companies know that it is unrealistic to expect borrowers to be totally debt-free. Instead, they will look to make sure you are not carrying too much debt relative to how much you earn. They want to know you will be able to afford to take on a mortgage payment.
They do this by reviewing what they call a debt-to-income ratio. Your debt-to-income ratio is how much of your monthly income goes toward paying off debts. Ideally, to buy a home, your ration should be less than or equal to 36%. To find your current ratio, add together your monthly income then divide that amount by the total sum of your recurring monthly debts (except rent.)
If at this moment your debt-to-income ratio is too high to be approved, you have two options. You can either find a way to generate more income or pay down your debts. If you are serious about buying in the near future, you may want to talk to a local lender about which specific moves will have the biggest impact on your finances.
Your budget allows for some savings.
In addition to a steady paycheck and manageable debt, the next piece that needs to be in place before you can stop renting and buy a home is some sort of savings. It should not come as a surprise that buying a home does come with some sizable upfront costs.
The first expense you need to consider is your downpayment. You can get a conventional loan for as little as 5%, while loans back by the Federal Housing Administration (FHA) typically only require 3.5%. Even better, if you are in the service or a veteran, a Veteran's Affairs (VA) loan with 0% down could be an option. There are even more options available based on where you are purchasing a home.
In addition to the downpayment, there are also closing costs to consider. Closing costs account for any fees necessary to facilitate the transaction. They usually amount to about 2% of the sale price and who pays this cost can be negotiated between the buyer and seller.
You are ready to settle down.
This last sign is more subjective than the rest, but it is just as important. Owning a home is a big lifestyle change and, before you take the leap, you need to make sure that you are ready for all that comes with it.
One sign you are ready to settle down is that you like your area and intend to stay there for the foreseeable future. Conventional wisdom says that, if you buy, you should be prepared to stay in your home for at least the next five years in order to get the most out of your investment. If you see yourself putting down roots for that long, you may be ready. However, if you think your life could change drastically in the next five years, it may make more sense to continue to rent.
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| Kimberly is a residential agent with Berkshire Hathaway HomeServices Premier Properties. Since 1987, she has helped home buyers and sellers in the Fargo-Moorhead metro area achieve their real estate goals. |
----- KIMBERLY VAN HAL | Good to Know® -----
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