6 Signs You’re Ready for Home OwnershipSeptember 17, 2022
Renting gives you the freedom to relocate whenever your lease is up and has none of the responsibilities of homeownership. But most renters, at some point, desire a home of their own.
Owning a home helps you establish roots in a community and build your financial future through equity in your home. However, before you start exploring kitchen appliance packages and picking out paint colors and flooring, you need to determine if you are ready to buy a home. Deciding to purchase a home is a major life decision, so here are six signs to help you know if you are ready for home ownership.
1. Your Rental Payments May Be Going Up
Many people find it difficult to continue renting, as rent payments have increased. The consumer price index for rent increased by 6.3% as of July 2022 compared to the previous year. For 2022 going into 2023, the New York City Rental Guidelines Board increased rents by 3.25% for one-year leases and 5% for two year-leases. If your rental payments have risen to the point where you cannot afford your apartment and maintain your lifestyle, it may be time to research and explore your options for home ownership.
However, you may need to pay a breakage fee if you want to move out earlier than your lease allows. A breakage fee is usually one month’s rent or more. It may add up to the total amount of the full rental payments left in the remaining period of your lease. Speak with your landlord or apartment complex manager about this option and prepare to pay the required breakage fee.
2. You Have a Solid Credit Score
It’s essential to have a good credit score when applying for a home mortgage loan because lenders want to know if you can afford your home loan payments. Your credit score determines how much money you can borrow from a lender and whether they will approve your application.
The Consumer Financial Bureau advises that a higher credit score indicates a better credit history and entitles you to lower interest rates and loan terms. Although some borrowers with a credit score as low as 500 can qualify for an FHA home loan, they must make larger down payments and pay higher mortgage interest rates. They also have to pay an upfront mortgage insurance premium and an annual insurance premium based on the loan term and the initial loan-to-value ratio.
To apply for a conventional loan, it is recommended that you have a score of 620 or higher. If you are unsure of your credit score, you are permitted one free credit report annually from each of the three main credit reporting agencies: Experian, Equifax and TransUnion. Try to spread out your requests over 12 months so it is easier to identify errors and track if your score is improving.
3. You Have Money Set Aside for Homeownership Costs & Maintenance
Besides mortgage payments, your income must also cover home maintenance costs and unexpected repairs for a larger space. When an air conditioner goes out on a rental unit, it is the landlord’s responsibility, not yours. As a homeowner, you may have to pay to replace an HVAC system with another, such as the innovative ductless MRCOOL mini split system.
Assessing your homebuying readiness also includes evaluating utilities such as electricity, gas and internet service. Condo fees and Homeowners Association (HOA) dues can add up if you plan to buy a condo or a home in a planned community. You are also responsible for property taxes and homeowner’s insurance.
4. You Can Afford the Down Payment
Your mortgage down payment influences how much of a loan you can get and your interest rates. Many types of loans require a 5% down payment, but you can reduce your loan repayments if you can afford to place a 20% down payment on your home. Putting down 20% on a conventional loan also means you don’t have to pay private mortgage insurance (PMI).
The Consumer Finance Bureau recommends looking into your current savings and investments to understand your available funds better. Set aside money for moving costs, potential home improvements and emergency savings. You can then determine how much you can contribute out-of-pocket at the closing of your loan. You can subtract closing costs from the available cash to determine your down payment. Closing costs can range from 2 to 5% of the home purchase price, depending on the purchase price, lender costs, loan type and the location of your home.
5. You Have Job Security and a Stable Income
If you love your job and plan to stick with it for the foreseeable future, now might be a great time to buy a home and commit to making monthly mortgage payments. Lenders also want to see that you have enough income to cover your mortgage payments and you can prove steady full-time employment. They will ask for at least two years of bank statements, pay stubs and tax records to minimize their risk.
6. You Can Afford to Update Your Home
A stable income and job security let you afford to upgrade your home and design your space for your needs. With a family in mind, you want more space and amenities than a rental without worrying about the lack of space and neighbor complaints.
Adding an ergonomic shower system, a vanity with two sinks and a toilet with a bidet can transform your bathroom into a multifunctional space. You might also consider upgrading your kitchen with professional ZLINE appliances to help you maximize your cooking efficiently. You can also convert a bedroom into a home office if you work from home, a playroom if you have young children or a basement into a rec room for teens.
Home Ownership Can Be a Life-Changing Experience
Purchasing a home requires careful financial planning and consideration of how much money you need to afford your home, unexpected repairs and maintenance, especially if you are a first-time buyer. It is also a special experience that gives you a stake in your neighborhood and extended community while allowing you to build financial security and grow financial responsibility in other areas of your life.