6 Signs That You’re Ready to Be a Homeowner
Ready to buy your first home? Join the millions of others out there who are navigating the waters of real estate for the first time.
It’s exciting, yet it’s completely intimidating at the same time, and for good reason. Your home is most likely the most expensive purchase you will ever make, so it’s not something you want to jump into without making sure you’re emotionally and financially ready.
Are you truly prepared for homeownership? Here are a few signs that’ll tell you that you’re primed to become a homeowner.
1. You’ve Got Your Overall Debt Load Under Control
It’s important to be realistic about your state of affairs when it comes to your money. If you have mounting debt from credit cards, auto loans, student loans, and other personal debt, you should probably straighten these out before you add more debt to the pile. Including another payment will just send you spiraling deeper into debt.
On the other hand, if your debt is under control, you’re probably able to comfortably handle monthly mortgage payments. You can easily find this out by calculating your debt-to-income ratio, which represents the percentage of your monthly income that is dedicated to paying off your debts. If a huge chunk of your income is dedicated to paying debt, you might find it difficult to meet additional monthly mortgage payments. Not only that, lenders might not approve you for a mortgage either.
Generally speaking, a debt-to-income ratio of 36% or less is usually considered doable. Anything over this percentage means you’ll probably be biting off more than you can chew. The lower the number, the more likely you’ll be comfortable making your monthly mortgage payments in full and on time each month.
2. Your Credit is Decent
Not only does your debt-to-income ratio affect your ability to secure a mortgage, so does your credit score. Do you even know what yours is? If not, it’s time to find out. Luckily, you can quickly discover what your credit score is by requesting a report from any one of the three major credit bureaus: Equifax, Experian and TransUnion. It’s free to get this report once a year, so there’s no cost to you.
Lenders will look at your credit score to help determine how likely you’ll be able to meet your payments, versus default on them. The higher your score, the better. If your credit score is at least 620, you stand a much better chance at getting approved for a conventional mortgage. You may be able to secure an FHA-backed home loan with a score of at least 580. However, your ability to be approved for a home loan will depend on other factors well, including the following.
3. You’ve Saved Up For a Sizeable Down Payment
Not only will a decent-sized down payment help your lender look favorably on you, it will also impress the seller. A bigger down payment means you will owe less on the principal amount of your mortgage. It will also help increase the odds of getting approved for a home loan, and score a better rate.
Depending on the type of mortgage you are applying for, you might be able to get approved for a mortgage with a down payment of 5% of the purchase price of the home. However, if there are some questionable factors in your financial history, such as dings on your credit report, you could be asked to come up with more.
There are actually some home loan programs that allow as little as 3.5% or even zero percent down payment, but specific guidelines will need to be met in order to qualify. Just keep in mind that anything less than 20% on a conventional mortgage will mean you’ll be paying extra for Private Mortgage Insurance (PMI), which basically protects the lender should you default on your loan. The more money you’re able to put towards your down payment, the less you’ll owe on your mortgage.
4. You’re Planning in Sticking Around
If your intentions are to settle down for a few years, then you’re probably emotionally ready to make the commitment. It’s important to keep in mind that the selling prices can be an expensive and lengthy one.
Selling your home in less than two years after buying it can potentially wipe out any real estate profits. You’ll also be slapped with tax implications from selling too quickly. The IRS allows as much as $500,000 in profits from the sale of a property to be exempted from capital gains on tax returns that are filed jointly, or $250,000 for single-person filings. But you’ll need to show proof that the home was your primary residence for at least two of the last five years in order to make sure that money is exempt.
If you’re not sure if you want to stick around for long, you may want to rent first. If, on the other hand, you have intentions of sticking around for the long haul, that’s a good sign that you’re ready for homeownership.
5. You Want to Start Building Equity
Think of your home as investment. In actuality, it is. You’re not only buying a home to live in, you’re also building wealth over time. Every payment you make towards paying down your principal every month and appreciation in value over time both contribute to growing your home equity. In fact, one of the biggest benefits of homeownership is the equity that you can build as time goes on.
Having a lot of built-up equity in your home can give you a lot of options. It’s somewhat like a forced savings account that just gets bigger over time. You can eventually use the equity to fund some of life’s major expenses, such as a college education, major home renovations, or even a once-in-a-lifetime holiday. Borrowing against the equity in your home affords you with a financial safety net. If you’ve got your eye on building equity, then homeownership is likely for you.
6. You Have a Reserve Fund Stashed Away
When it comes to owning a home, it’s not just your mortgage payments that you need to worry about. Along with homeownership comes all sorts of other expenses, many of which can pop up unexpectedly. It’s important to ensure that you’ve got a reserve fund on the side, preferably at least 6 months’ worth to cover the cost of your mortgage, utilities, insurance payments, credit cards, and other debt obligations. If you’ve got this money built up, you’re in a much better position to buy a home.
The Bottom Line
It’s much better to take the time to determine if you’re ready to buy a house before you seal the deal. Even though it might be frustrating to hold off on the big purchase as you answer these questions, you’ll be in a much better position to buy knowing that you’re fully ready to take the plunge.
