Are You Ready to Buy a Home? - Top 5 Things to Consider

Let’s be honest, not everyone should be a homeowner.  I mean we all know one person whose life always seems to be a mess. That one friend who has asked everyone they know for a small loan or to sleep on their couch.  That person might not be the right person for homeownership, at least not in their current position.  However, are you asking yourself the right questions to know if you are the right person for homeownership?  Let’s find out.

Deciding if you are ready for homeownership does not just involve emotions.  You don’t just look in the mirror one day or at your significant other and say I want a house, let’s buy one, and then just do it without taking many other things into consideration.  Maybe I should rephrase that and say instead “You Should Not just look in the mirror one day and say ‘I want a house so I’m going to buy one’, without taking anything else into consideration.”  Homeownership is a serious matter and should be given serious consideration before taking it on.

I bought my first home almost 25 years ago and I still remember the excitement and the fear.  My husband always understood making your money work for you and that’s why we decided to buy our first home, but it is not the only thing we took into consideration.  The following is a list of things that you need to consider before getting your heart set on buying a home.

1. Do I/we have a steady, dependable income?
2. Is my/our credit score/s solid?
3. Is my/our debt reasonable and manageable?
4. Do I have the funds for a down payment and closing costs and if not how will I get them?
5. Do I plan on remaining where I am for at least three years?

I hope having a steady and dependable income is self-explanatory, but if you have questions regarding that put them in the comments below.

Credit scores are often a topic people don’t want to discuss. If you are unwilling to discuss difficult things, you may not want to get a mortgage. Your credit score is a large factor in obtaining any mortgage. See the chart below for minimum credit scores per loan type.

There are three main nationwide credit reporting companies, Equifax, TransUnion, and Experian. Mortgage lenders use a combination of all three.

I meet a lot of first-time homebuyers who have a low credit score because they never paid it any attention.  There are a lot of people out there, often young people,  who don’t know what affects their credit or how to grow credit.  I will discuss this in a future blog but I encourage everyone to educate themselves and their children about this, it’s a pretty simple Google search, but feel free to contact me for help in understanding this as well. 

Is your debt reasonable and manageable?  It doesn’t matter how much money you make if you owe every penny of it to someone else. According to bankrate.com, it is very difficult to get a mortgage with a debt-to-income ratio exceeding 50%, although limits vary by lender and exceptions can be made.  To figure your DTI ratio add your recurring monthly debt payments (rent/mortgage, car payments, credit cards, etc.) and divide this by your gross monthly income (income before taxes).  For example, say you pay $2000 in rent, $700 in child support, $1000 in other debt, and you earn $10000 per month before taxes.  This would give you $3700 / $10000 and a 37% debt-to-income ratio. According to lendingtree.com DTI ratio requirements for mortgages usually range from 41% to 50% with conventional loans having the strictest.  35% DTI is considered good and up to 49% may be considered manageable, but over 43% may deter lenders. If you are able to pay your recurring expenses every month, are able to easily pay unforeseen things that come up, and are able to save something as well,  then your debt may be manageable for you. If you struggle to pay all of your expenses and have nothing in savings, your debt is unreasonable.  There are countless understandable reasons why people may struggle to pay their bills during normal years and we have had several very abnormal years recently.  If you feel overwhelmed with the amount of debt you have incurred, seek assistance from a trusted authority.  You can start with the Federal Trade Commission.

A down payment is the amount of money you’re required to put down on your loan and that varies depending on the type of loan, the home, and your financial situation. Down payments usually run from 3% to 20%.  Lenders collect down payments to protect themselves in case of defaults. Closing costs are the fees involved in getting a loan and buying a home and they are due at the time of closing.  When you are speaking with a lender and getting estimates for your monthly payments, closing costs are not figured into this.  When a lender discusses how much your down payment will be, closing costs are also not involved in this. “No down payment”, does not also mean “no closing costs”.    Closing costs are paid at the time of closing and it is said that they usually equal 2-3% of the loan amount. They include things like lender fees, title searches, appraisal costs, attorney fees, and more. The South Carolina Association of Realtors Contract to Buy

and Sell Real Estate makes it clear in item 6, as you can see here,  who is responsible for different transaction costs. Make sure to ask your lender, your real estate agent, and your closing attorney about your closing costs in advance.   Down payments and closing costs are paid by cash, certified check, cashier’s check, or wire transfer.  Always make sure to contact your closing attorney to find out their requirements on how it is provided.

It is impossible to tell you how long you must own a home to break even because everyone's circumstances are unique.  However, as an agent, I most often hear 3 to 5 years.  Things to keep in mind are that capital gains taxes are enacted on homes sold after less than two years, and to recoup closing costs and agent fees you need appreciation and that takes a little time.  This being said, three “average” years give you time for the possibility of breaking even.

I know this is all a lot to take in.  Therefore, in the heat of getting a mortgage, we may forget all of the positives aside from the financial gain that homeownership provides. Having a place that is solely your own provides a sense of security, freedom, space, privacy, and much more. If you are ready to find the perfect place to start enjoying all of this, I’d love to hear from you.  I find it a privilege and immensely satisfying to find people homes that they love.