This post comes from Sean T. Johnston at our partner site Zing!
Being a renter has its advantages. For the most part, you don’t need to concern yourself with costly indoor or outdoor maintenance. When your lease is up, you can just leave. You don’t have to worry about selling the property.
But as convenient as renting is, you are, in essence, paying someone else’s mortgage. While the responsibilities of being a homeowner are greater, so are the rewards. You can make whatever modifications you’d like without having to worry about a landlord. In addition, there are lots of tax deduction options available to homeowners that aren’t there for renters.
But perhaps the most important distinction is the fact that, when you pay your mortgage, you’re building equity in something that has value. You can borrow against this equity to pay for important purchases, giving you credit options not available to renters. You own the property too, and you can sell it whenever you want.
If homeownership sounds like something you see in your future, here are a few financial questions you need to make sure you have the right answer to.
Do You Have a Steady Income?
You probably already know this, but buying a home is a pretty sizable financial commitment. If you’re like most of us, you’ll be paying off the house for fifteen to thirty years after you sign the paperwork. To do this, you’re going to need a steady, reliable stream of income.
One of the first steps of the underwriting process will be income verification. You’ll need to submit your paystubs and verify your income history. Mortgage underwriters would like to see steady income; gaps or fluctuations could raise red flags.
It’s not just about how much you make, but how much you owe as well. This relationship is called your debt-to-income ratio (DTI). Take the amount that you make each month and divide it by the total of the minimum payments on your debt. Your DTI is like your golf score – the lower, the better. While each person’s financial circumstances are different, if your DTI is 75% or lower, you can probably qualify.
How Much House Can You Afford?
This is one of the most important and fundamental questions when considering whether you should buy a home. Since you could conceivably be paying your house off for decades, you want to make sure the monthly payments are something you can fit into your budget.
The first thing you need to do is get a list together with all of your monthly expenses. Include everything that you pay each month and everything that you make each month.
Take a look at what’s left over each month and figure out what a comfortable mortgage payment would be. Just because you have $2, 000 left over doesn’t mean you want to shoot for a $2, 000 mortgage payment. First of all, you’ll also need to include taxes and insurance, plus a good savings pad for yourself to pay for unanticipated home expenses or surprises that come up.
It’s better to have a lot of money left over each month than to have a house that you’re struggling to make payments on.
How’s Your Credit Looking?
In addition to your DTI, your credit score is going to be a major factor in determining your eligibility to get a mortgage on a new house.
Fair or not, your credit score essentially tells banks and lending institutions what kind of risk is involved in lending money to you. There are a lot of factors that go into your credit score including how much credit you use, how much you currently owe and your payment history.
If your credit score is 620 or above, you’re probably in decent shape to get a mortgage. If you’re unsure or you know that your credit score could use some work, you have options. Check out Quizzle. There, you can receive a free credit report and credit score and take advantage of tools and tips to help you improve your score and help you achieve your goals of homeownership.
Are You Ready to Put Down Roots?
In addition to the financial commitment you make when you buy a house, you’re also making a commitment to your neighborhood. Purchasing a home means you’re looking to stay in that area for a while, if for no other reason than the expense and complicated nature of selling a house.
If you have a job that requires you to relocate frequently, you might want to consider renting until you feel confident that you’ll be able to stay in one location for a few years.
Can You Handle the Maintenance Costs?
One of the biggest bummers associated with homeownership is the cost of maintaining your property. It’s kind of nice being a renter. Most of the time, if something breaks, you just have to call your landlord. When you buy a home, you are the landlord, so you’d better be ready.
It’s not always the big stuff like a furnace or a roof that can cost thousands of dollars. The little things, stuff that maybe you never even thought about before, can add up. Random items like lighting sconces, landscape edging, garage storage, brick pavers and furnace filters are all your responsibility.
I’m not trying to paint a bleak picture, but the responsibilities of maintaining a property can quickly overwhelm new homeowners. Make sure you know exactly what’s involved before you sign on that dotted line. A thorough inspection by a good home inspector is always a worthwhile investment before you buy a house.
If you’ve carefully considered the questions above and feel confident that homeownership is in your future, click here to get started.
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I live outside the big Army base of Ft. Riley KS and I see many soldiers buying fairly expensive homes here. I understand the need to have your own place, to get away from the Big Green Machine and have some semblance of privacy. The problem I see as a former Realtor is that most of these service members only stay at a base for about 3 years before they change stations. This is usually not enough time to build equity, so while the tax advantages may be helpful during their time in the home, the initial costs ( deposits, window coverings, home owners insurance, property taxes, flood insurance, lawn care, appliances, internet, cable, etc, etc ) and then the costs when selling is much much more than any tax savings. There is no Realtor commission when buying but can be up to 7% when selling. So that equals $14,000 on a $200,000 home. Has the home appreciated that much in 3 years? Plus most buyers will require an inspection, and issues found are paid by the seller. In this market, the seller usually loses money. So consider renting in these small market communities, or live on post.