Deciding to purchase a home is the most important financial decision of a lifetime for many people. That’s why it’s something some folks put off or avoid entirely. Perhaps financial instability and debt prevented you from buying a house in the past. But if you’re considering buying a home for the first time, here are five signs you’re ready.
1. You’re tired of paying rent
Renting may make sense, depending on your salary and lifestyle. But at what point do you stop dropping your hard-earned money into a rental property and start investing in a home of your own?
The benefits of renting are obvious. Property needs a new roof? Plumbing issues? Just call the landlord. When you’re a homeowner, you’re left holding the bag. You’ll need funding, time and resources to fix problems that inevitably arise.
When you’re renting, however, you’re spending money you’ll never get back. Homeowners, on the other hand, can look forward to building equity they can eventually borrow against. As the gap between what you owe and the value of your home increases, you can also use your home equity as an emergency fund or a source of retirement income.
2. You’re starting a family
Buying a home could be a good idea if you’re starting a family. After all, the apartment you started renting in your early 20s may not have enough space for a toddler and a dog.
When searching for the right home for your family, ask yourself these important questions.
Will you be comfortable there in five years? Find a home that meets your long-term needs. A private kitchen and living room may be your preference, but an open floor plan may be a better investment as your kids grow. Stairs or a steep driveway may be fine until you have kids and groceries to carry.
How’s the yard? Fencing can lower your homeowners insurance rate. Keeping up a yard and a fence, however, may take time and cost money. This is especially true if you have an energetic pup, as you'll need to patch any holes in your fence during the pet-proofing process.
How are the schools? Do your research and learn more about the quality of the schools in your prospective neighborhood. Check the cost and availability of preschools and early learning centers. Make sure crosswalks are safe and if possible, avoid moving near heavily trafficked streets your kids might eventually have to navigate.
What’s your new neighborhood like? Again, busy roadways are not ideal when you have children. Before committing to living somewhere, visit the area during morning commute hours and at night. Talk to some neighbors. Get a feel for the neighborhood and find out whether it’s a safe place for strollers, jogs and evening bike rides.
3. You want to establish roots
You may want to trade in your rental property if you’re ready to join a community. Whether you’re a first-time homeowner or you're buying a home to retire in, you’ll build relationships and put down roots in an area that’s hopefully growing and thriving.
Remember that a home is ultimately an investment. It’s a place you can mold into something unique. Your home will be a point of pride and a place where you can grow old.
4. You’ve saved enough for a down payment
It may be time to stop renting if you can afford a down payment. For first-time homebuyers, that’s often a major hurdle.
The standard for a conventional home loan is 20%. For a $300,000 home, you would need to put down $60,000 to meet that requirement.
Alternative financing is available if you can only make a small down payment. Homebuyers with decent credit, for example, may qualify for a Federal Housing Administration (FHA) loan which requires a minimum of 3.5% down. The downside? You may need to pay for private mortgage insurance.
Besides the down payment and insurance, buyers are often responsible for paying closing costs (though not always), moving costs and a mortgage. If you can’t put down a significant amount, consider boosting your savings before buying your first home.
5. You have a stable source of income
In a perfect world, job loss wouldn’t be a concern. Unfortunately for many people, it’s a real threat.
While a layoff might always be a possibility, you may end up with a consistent stream of income. At that point, buying a home could be worthwhile.
Before you take the plunge, just make sure what you’re bringing home exceeds what you’re spending on debt payments. Lenders will check your debt-to-income ratio (DTI), or your monthly debt payments divided by your gross monthly income. If your DTI is higher than 43%, you’re not eligible for a qualified mortgage.
Bottom line: You’ll need to have your finances in order before you're ready to buy your first home. If there’s room in your budget for a potential mortgage payment, you’ll feel more confident about owning a home. Already in the process of picking out your dream home? Learn more by checking out our posts on homebuying for HSPs and introverts and buying a home with someone you're not married to.