Renting versus buying a home is a major decision for many people and also a complicated one. While some say renting is a waste of money and that you are only paying someone else’s mortgage, others say renting provides flexibility compared to staying in one place.
If you’re thinking about possibly buying a home this year, how do you know you’re ready to make that decision? Deciding on whether to rent or buy a home is costly and complicated, but logic and your personal views can help you make your final decision. Here we have seven signs you are ready to buy your first home which will help you decide.
1. Your rent payments continue to increase.
With rents escalating across the country and rent costs exceeding the average monthly mortgage payment of a single-family home, renters may want to buy a home instead to reduce costs. If you feel trapped by rising rent payments and resulting uncertainty, purchasing a home is a better option because your mortgage payments are consistent, and you are also putting equity into your biggest asset: your home.
2. You have steady employment and income.
Your employment history is another important factor in the mortgage application process. Lenders and mortgage companies, in looking at your employment history, want to see that you are able to continue paying your debt with a steady income and have spent at least two years working for the same employer or in a similar field. If you are a freelancer or a gig economy worker, your W-2s, tax returns, and related documents can prove that you have a steady source of income, an important factor in mortgage approval. For lenders, a stable job means stable income, which makes you a lower-risk borrower because you can pay your debt.
3. You’ve already saved up for the costs of buying and owning a home.
According to the 2019 NAR Profile of Home Buyers and Sellers, saving for a down payment is the most difficult step in the home buying process for many buyers, and saving up is even more challenging with student loans and credit card debt. If you already have a stable job and your income has improved, you can then be better able to save extra money to cover the additional costs of owning a home.
The 20% down payment requirement for mortgages does not always hold true. For example, Federal Housing Administration loans (FHA loans) require only 3.5 percent of the home’s purchase price. Government loans, such as loans offered by Veterans Affairs (VA Loans) and the U.S. Department of Agriculture (USDA Loans) require no down payment at all, so there is no down payment you have to cover.
If you have already saved up for closing costs, property taxes, homeowner’s insurance, and other housing expenses, you are ready to buy your own home.
4. You’re managing your debts effectively.
You don’t need to be totally debt free to apply for a mortgage, but loan companies need to make sure that you are able to take on additional debt and don’t have too much debt already compared to what you make. Loan companies use your debt-to-income (DTI) ratio, or how much of your monthly income goes to paying debts, to assess this, with ratios lower than 36% being the ideal. Borrowers with no more than 43% DTI can still get a home loan, but paying your current debt down can increase your chance of pre-approval. Paying your debt down will not only increase your chances of being pre-approved but it will also make the process easier, so assess your spending habits as a renter and change them as needed to be able pay down your debt.
5. Your credit score is in good shape.
Low credit scores can be a huge barrier for renters to buy homes. Credit scores matter because they determine your interest rate and borrowing amount. A good FICO score is at least 690, but you can still qualify for a mortgage even with a score as low as 500, depending on the loan program.
When was the last time you have checked your credit report? If your credit score has been improving because you are paying down your debts on time, you can get more conventional loans with lower down payments. Once you have fixed and improved your credit, homeownership becomes even easier and more possible.
6. You’ve found a neighborhood you love and want to stay in.
Your preferred location and whether you can settle in one place are also important factors in buying your first home in addition to financial factors. Renting is a better option if you know you will stay in a particular area for only a couple of years maximum if at all or if you want to test out different areas before buying a home.
Once you have found a neighborhood you love that you would be willing to settle down in for the next five years and have a secure and stable source of income, purchasing a home is the next logical step in the home-buying process.
7. You’re emotionally ready to become a homeowner.
Being emotionally ready to own a home is the most important part of the home-buying process. 29 percent of all buyers mention the desire to own a home as their main reason for buying a home, according to the 2019 Home Buyers and Sellers Generational Trends Report by the National Association of RealtorsⓇ. When you own a home, you’ll be in charge of all the repairs, maintenance, and upkeep costs, so renting for longer is a better option if you’d rather leave these costs and tasks to a landlord, and many prefer renting because of this.
You’re finally ready to buy a home and take on the huge responsibility of home ownership and becoming your own landlord if you are comfortable and ready to do maintenance on your house and even enjoy fixing up your place.