- Have you begun to reevaluate your housing options after months of quarantining?
- Are you ready to take to leave renting in the dust and become a first-time homebuyer?
- Would you like to buy a home but are unsure if you are ready?
The reality is the decision to buy or to rent will have far-reaching implications for your financial situation as well as your and your family’s happiness. For instance, becoming a homeowner offers individuals the following benefits:
- More control as to how you want your space to look or how you wish your space to perform.
- The opportunity to build equity in one’s home over the years due to the likely appreciation of home values.
- Potential and significant tax advantages and savings, among other benefits.
While owning a home is quite rewarding on several levels, the process of buying a home can be overwhelming – especially to those who have yet to negotiate the path to homeownership. But these available homeownership benefits do not necessarily mean that renting is a better option than owning for every individual.
So, Are you Ready to Purchase a Home?
- 1.1 #1 – Monthly Rents Are Consistently Rising
- 1.2 #2 – Your Income Is Secure and Consistent
- 1.3 #3 – You Are Proactively Paying Down Debt
- 1.4 #4 – You’re Ready to Make Long-Term Plans
- 1.5 #5 – You Have a Good Credit Score and Profile
- 1.6 #6 – You Have Enough Savings to Make a Down Payment Comfortably
So, Are you Ready to Purchase a Home?
Deciding to purchase real estate is likely to be one of the most significant financial decisions of your life. So, how can you move forward with relative certainty that your decision to purchase a home is the right financial move?
Read on to learn more.
At some point, chances are, most renters will ultimately conclude that continuing to rent does not make fiscal sense over the long term, except for very specific, if not unusual circumstances. If you have reviewed your finances and financial scenario and have determined that:
- Your fiscal life is stable and somewhat predictable,
- You have sufficient savings and the ability to continue to save, and,
- Your credit is in good shape – you just might be at the precipice and ready to become a first-time homebuyer.
Let’s review some of the signs that it is time for a renter to begin to seriously consider venturing into the homeownership realm.
#1 – Monthly Rents Are Consistently Rising
From April 2020 to April 2021, one-bedroom median rental prices in the United States rose by 2.1%, with two-bedroom median rental prices seeing a 3.4% increase for the same period. (See Zumper Rental Report)
Source – Zumper
For long-term renters, this recent rise in rental prices is likely to be the first price increase in some time and likely to continue as the housing market remains a beacon of strength despite early predictions. According to the above-noted Zumper Report, the following represents some of the more significant rental price changes during April 2021–
- Cleveland, Ohio, saw an increase in rental prices of 5.3% for one-bedroom units.
- Washington, DC & Augusta, GA saw an increase in rental prices of 4.9% for one-bedroom units.
- Baltimore, MD, Knoxville, TN & Tulsa, OK saw an increase in rental prices of 4.8% for one-bedroom units.
Conversely, a monthly fixed-rate mortgage payment will never increase, although taxes and insurance payments have the potential to rise.
#2 – Your Income Is Secure and Consistent
If you have been working at the same job (or on an upward path of mobility in the same line of work), and your income is stable – defined as income paid in a fixed amount regularly, you have likely met one of the most important aspects for a mortgage underwriting approval. A documented stream of consistent income demonstrates to a lender that a borrower can repay their mortgage debt as agreed – at least for a minimum of at least three years or more, based on submitted verifications & documentation.
Mortgage lenders prefer to see that a borrower’s stable income is also sufficient to cover the proposed monthly housing expense, as well as other long-term debts. And while a stable income is typically based on someone’s regular salary, overtime, commission payments, and bonuses can be used if they have been earned on a consistent basis and are verified by acceptable means.
#3 – You Are Proactively Paying Down Debt
The reality is one does not need to be free of debt to become a homeowner, which is often contrary to public opinion. And while it would be ideal, it would not be realistic as most Americans have debt they regularly maintain – be it a car loan, a student loan, or even credit card debt. So, if you are making headway and paying down debt proactively, you just might be ready to become a homeowner.
The way in which a lender determines if a borrower’s debt load is within manageable limits is the calculation of a Debt-to-Income (DTI) ratio – a standard measurement that helps underwriters make credit decisions based on the evidence provided that a borrower can successfully manage their anticipated monthly payments – across the board.
Lenders can set their maximum DTI limits, but it is noted that most prefer that borrowers have a total DTI of 36% to receive the best rates and terms. However, there are financing scenarios that allow up to a DTI of 43% if the mortgage application has various compensating factors. According to the CFPB – Consumer Finance Protection Board, historical evidence strongly suggests that borrowers with a DTI higher than 43% are simply more likely to find it challenging to make monthly payments. This is the reason that borrowers can no longer receive a qualified mortgage if their DTI ratio exceeds 43%.
#4 – You’re Ready to Make Long-Term Plans
Unless you plan on flipping houses as a full-time business, a home purchase is more accurately recognized as a long-term investment. In fact, the median price of a home in 2020 hit a record high that was just north of $320,000 – a 15% year over year rise!
Source – MacroTrends.net
And while most renters find splashy headlines about record prices of homes across the country either overwhelming or concerning, the reality is that while the value of homes has been on the rise recently, mortgage rates have fallen to historic lows. As such, the issue of home affordability is actually a whole lot better than it appears on its face.
If you have a plan that includes staying in your current job and remaining in your present location, you are likely ready to become a homeowner and put down permanent roots. But this only makes fiscal sense if you intend to hold onto the property for at least a few years – as this will allow a borrower to recoup the costs required to close the mortgage, at least in typical circumstances.
And while it can be challenging to predict one’s movements over the next few years, this exercise is often used as a guide to help first-time homebuyers from plowing headfirst into a purchase just because everyone else is buying real estate at breakthrough levels.
#5 – You Have a Good Credit Score and Profile
Preliminarily, it is important to note that every consumer should take advantage of the free credit report offered each year by the nation’s primary credit repositories. This suggestion is important as it helps consumers ensure their credit profile is accurate and reflects the reality of the individual’s previous creditworthiness and that their credit profile has not been lifted by a criminal and is now being used for identity theft. [See FTC’s Consumer Info Regarding the Fair Credit Reporting Act]
A consumer’s credit report includes data that reveals where they live, if there are any legal issues attached to their credit profile account (i.e., bankruptcy, repossessions, charge-offs, etc.) and the way a consumer pays their bills. The three repositories – Experian, TransUnion, and Equifax essentially sell each individual’s credit report information to companies that use the information to evaluate applications submitted to –
- Insurers – for insurance policies.
- Creditors – for car, student, personal, and mortgage loans.
- Employers – for job applicants.
- Businesses – for evaluations concerning extending credit to a buyer, to name a few.
A good credit score demonstrates to a lender that you will be likely to pay the mortgage according to the agreed-upon terms and that you have taken the responsibility of other debts seriously. And, if a credit score reaches the upper limits – and considered exceptional, lenders are likely to be more flexible with regards to a high DTI – especially if the applicant’s income is stable, with a significant down payment on the purchase contract.
If you have been living within your defined means and actively paying down debt, your credit score likely meets lending guidelines, and you are in a strong position to become a qualified homeowner.
#6 – You Have Enough Savings to Make a Down Payment Comfortably
Buying a home is often an expensive proposition, which is why consumers must proactively strive to save the funds needed to buy a piece of real estate that will meet their requirements and needs. In addition to the required down payment, borrowers are also required to be able to pay for closing costs, which vary from location to location, across the country, but can typically cost between 2% and 5% of the mortgage loan amount, on average.
In addition, lenders prefer to see that borrowers are not flat broke after closing, so they look for documentation of reserve funds that can be used for emergencies if needed. And it is important not to forget that additional funds may be needed for moving, additional furniture, or appliances, among others.
The Bottom Line
Buying a home facilitates the escalation of wealth for those who take advantage of this investment opportunity. The reality is that a renter – paying a monthly rental amount of $1,500 per month, will spend more than $500,000 over three decades. Here is the math:
$1,500 * 360 months = $540,000
Perhaps the insult to injury is the fact that after paying $540,000 – out of pocket, a renter is exactly where they began – owning nothing and paying the bills for another property owner. Let’s compare this $1,500 monthly payment with the same monthly nut that leads to homeownership:
Relevant Loan Terms
- Loan Amount – $240,000 – with 20% downpayment
- Interest Rate –3.5%
- Term – 30 Year Fixed Rate
- Monthly Principal & Interest mortgage Payment – $1,077.71
- Monthly Taxes – $250
- Monthly Insurance payment – $83.33
Total Monthly Payment = $1,077.71 + $250 + $83.33 – $1,411.04
At the end of three decades, a homeowner will have:
- Paid off an outstanding mortgage balance for themselves of nearly a quarter-million dollars – leaving their home free and clear – and likely a value that is significantly higher than the purchase price thirty years earlier.
- Received a significant tax advantage through the allowable deduction of mortgage interest.
- Had the opportunity to allow the property to appreciate over the three decades while their family resides in the property!
The decision to move from a position as a renter to homeownership is quite personal and requires a well-conceived financial plan that deals with the specific aspects of your financial situation. To be sure you are appropriately preparing for a home purchase – it is essential to speak with a mortgage professional, well in advance, as the extra time allows for unexpected potholes on the road to homeownership.