Signs You Are Ready to Become a Homeowner
There is no denying the flexibility that renting offers—you can move relatively quickly when you want, and you do not have to carry a mortgage for decades to have a place to live. However, if you are like many renters, you are probably at least considering the idea of owning a home.
But how do you know if you are ready for homeownership? Here are some reasons why you might be prepared to become a homeowner. If some or all of these resonate with you, it’s probably time to talk to a real estate agent you trust to start looking for a place you can be happy owning and living in.
The opportunity to become a homeowner can be both emotionally and financially rewarding when you have a long-term horizon. By following some sound first-time buyer tips, you’ll ensure that your journey from renting to owner goes smoothly.
The following are some of the most common reasons why renters decide now is the time to own a home:
1. Your Rent Keeps Increasing.
In most areas of the country, rents are rising and rising. The increase in rental prices can be frustrating for numerous reasons. You cannot anticipate your housing costs over the long term, which makes it hard to plan your finances.
You also probably feel some frustration with landlords—after all, who likes being told that they need to fork over yet more rent money in the coming year? There is also the uncertainty of the whole situation that can get to you. Your income is probably not shooting up and up each year, so why should you be expected to pay more and more rent?
When rent is going up and mortgage rates are low, it can be a good sign that you should start shopping for a home. If you think about it – when you are renting, you’re probably helping to pay someone’s mortgage. Unfortunately, that person isn’t you!
Some folks aren’t quite ready to go right from renting to becoming a homeowner. Often the reasons are financial ones. It could be not enough of a down payment or high amounts of debt, possibly from student loans.
At times, if you can find the opportunity, renting to own a house might make sense. Of course, there are pros and cons associated with rent-to-own arrangements, so make sure you understand them.
2. Interest Rates Are Incredibly Attractive.
One of the better reasons to go from renting to owning a home is when money is unbelievably cheap. When interest rates on mortgages are desirable, it’s like a flashing sign that says “buy buy buy.” Interest rates won’t stay at record lows forever. History shows us that they can turn instead quickly.
When they do, it will be a lost opportunity if you were in a position to buy. Low-interest rates are an excellent reason to consider purchasing a home.
3. You Have a History of Managing Your Debt Well.
Lenders look closely at the amount of debt you have and how you have managed that debt. Ideally, a lender wants you to have a 43% or less debt-to-income ratio, although some conventional loans will allow you to have a 50% DTI.
You can calculate your debt to income easily by adding up all of your monthly debt payments. Once you know what your monthly debts cost, you can divide that number by your gross monthly income.
If you have high balances on your credit cards, you can pay them down to look more appealing to lenders. You do not have to pay them off completely.
Instead, pay them down enough to hit the right DTI. Then, you can put that extra money into building an emergency fund for your home.
4. You Think It’s Time to Put Down Roots in a Specific Place.
Purchasing a home requires paying a lot of costs at the beginning that cannot be recouped in the first few years of ownership. In other words, for a home purchase to make financial sense, you need to be ready to stick around for a while. Over time, the investment can prove quite positive, but it does take time.
Real Estate has been shown over and over again to be an excellent long-term investment. Like other investments, it is not for someone who might need to move quickly because of a job relocation.
Lenders prefer you to have had the same job for a while as well, a job you are probably going to stay at for years after you purchase the home. They prefer you to have a steady, stable income so that you are less of a risk. Your regular income ensures you won’t miss mortgage payments.
5. You Have a Specific Home or Neighborhood You’ve Pictured Yourself in.
The desire to live in a particular property or neighborhood can be powerful. Maybe your parents are getting ready to downsize, and you have always thought that owning their place would be a great idea? There may have been a house in the town you’ve always wanted to own if it became available?
Some buyers have always pictured themselves living in a desirable neighborhood in town with all of the amenities nearby that you love. There are different strokes for different folks, and emotional attachment can be highly influential in that thinking.
Some people have specific subdivisions they have in mind due to the excellent environment for their kids.
6. You Are Sick of Pouring Money Into Someone Else’s Mortgage.
As a renter, your rent payments are paying the mortgage of the landlord or property owner. If you are ready to put all that money towards your future, buying a home makes sense. Each mortgage payment you make will increase the equity in your home, which is an investment for you.
A home purchase is not always a guaranteed home run—all investments carry risks. But, generally, you can expect that you will gain many financial benefits from putting money into the property over the life of your mortgage.
There are also tax advantages of owning a home as well. When it comes time to sell, you could have a sizable real estate capital gains exclusion. If you are single, the tax exclusions will be $250,000. If you’re married, the exclusion will jump to $500,000.
7. You Have The Financial Stability to Save For an Emergency Fund.
One standard piece of advice for every potential homeowner is to have an emergency fund in place for the unexpected. As a renter, your landlord pays for emergencies.
If a pipe bursts, a refrigerator breaks, or an air conditioner stops working, the landlord has to come in and fix it—and pay for those repairs. But as a homeowner, you are the one responsible for those expenses. You want to be confident you have enough money set aside to weather such emergencies.
I have written about things you need to do before buying a home, including having a down payment and money set aside for emergencies.
If you seriously consider buying a home, you need to start saving to create an emergency fund. That way, when something goes wrong—which is going to happen eventually—you can handle it without breaking a sweat.
Vanguard has an excellent resource that discusses some of the problems that can rear their ugly head you need to be prepared for.
8. You Just Got Married, and Your Apartment Doesn’t Work Anymore.
One of the most common reasons for going from renter to homeowner is a significant life event such as getting married. It is not unconventional thinking for two people to decide to find a home that blends common goals.
Having an apartment usually does not satisfy blending two families, especially if there are kids involved.
9. You Need Room For a Growing Family.
Having more room is another substantial reason for purchasing a home. If you are expecting to have a child shortly, it makes sense to start considering homeownership.
While renting is sometimes a necessity for growing families, if you are fortunate enough to be in a position where you can buy a home, doing so can offer many benefits for you and your growing family.
Your new home can give you room to expand, such as providing your family bedrooms, bathrooms, and all the other spaces that make life easier. The house can also serve as a stable location for peace of mind for you and all your loved ones.
By becoming a homeowner, you’ll be able to pick and choose the kind of property that will serve the needs of your lifestyle. Buying a home can not only be rewarding but fun as well. It is a chance to spread your wings and take another step towards becoming an adult.
10. You Are Ready to Pay a Down Payment and Closing Costs.
One of the most significant signs you are ready to move from renting to owning a home is having a down payment. Financial stability is a powerful indicator that you are prepared to buy a home—particularly when it comes to down payments and closing costs.
You want to be able to pay the down payment to get a mortgage, and you want to be able to pay the closing costs so you can finalize your purchase. And don’t worry if you don’t have 20% down—many loans do not require so much for a down payment.
There are numerous loan programs available for first-time buyers. It can be very confusing to a first-timer because of how many mortgage choices are out there. An experienced mortgage broker can come in handy to answer all of the questions you should be asking a lender. Remember, you should be interviewing them as much as they are interviewing you.
For first-time homebuyers, FHA mortgages have become really popular. Some FHA loans only require 3.5% down, while loans backed by Fannie Mae and Freddie Mac only need 3% down.
If you can come up with 3% down and qualify for the right loan—and have your closing costs in order—you can likely become a homeowner.
When buying a fixer-upper, you may also want to consider an FHA 203k loan which allows for rolling the costs of improvements into one mortgage.
11. You Have Improved Your Credit Score.
The credit score you bring to lenders will play a significant role in the type of financing you can get. The worse your credit score, the fewer options you have available when buying a home. That is why it is essential to do what you can to improve your credit score before you go to try and buy a home.
The better your credit score, the more options you will have, and the more money you can save on your mortgage.
If you have improved your credit score, it may be time to talk to a lender about what you can do to get a mortgage. You can sometimes qualify for a mortgage with a credit score of 500—but that does not mean it will be the mortgage that you want.
The mortgage will have an undesirable rate and will require a higher down payment. But, if you have a higher credit score, the loan will have a better rate and require a lower down payment.
If you need to improve your credit score, get a free copy of your credit report, and address any issues that might be hurting your credit score.
Mortgage professionals and real estate agents continuously preach about the importance of the best credit scores – this is why! While you can get a mortgage with bad credit, the terms offered by the lender won’t be ideal. You’ll end up paying thousands more for the property due to higher interest rates.