Are You Ready for Home Ownership?
You might feel like you are good and ready to take on the title of homeowner. You may be entering a new chapter of your life where your housing needs are changing, or maybe you’re simply fed up with rent increases and roommate hassles.
“Everybody’s situation is different. Some people feel that it’s time to buy a house because their family is growing, and for others, it might be a financial decision,” said Mat Ishbia, president and CEO of United Wholesale Mortgage.
Regardless of your reason, the homeowner title comes with great fiscal and emotional responsibility. Before you commit, take a step back and evaluate your readiness to buy. We’ll give you some concrete questions to ask yourself and steps to take in preparing for this new step.
How do you know if you’re ready to buy a house?
“You’re ready to buy a house when you can handle the financial and emotional responsibilities associated with owning a home,” Arielle Minicozzi, executive financial planner at Phoenix-based Sphynx Financial Planning, told LendingTree. “The emotional responsibilities include dealing with the stress of those financial responsibilities.”
Look for the following telltale signs to verify you are ready to handle the financial and emotional responsibilities homeownership carries.
When the rent is too dang high
“A lot of times, people are paying more in rent than they’ll actually pay in a mortgage, without getting any of the benefits like housing appreciation and tax benefits, along with the pride of owning a home,” Ishbia said.
He said when you get to that point, it’s a sign you should look into buying a home. You can get a sense of the mortgage payment you’d have in your area using LendingTree’s mortgage payment calculator. Ishbia recommends working with an independent mortgage broker who can help you find and get pre-approved for a loan you can afford.
When you need to make a fresh start
If all of your kids have flown the coop and left you with an empty nest, you may be considering downsizing your home to trim expenses in retirement. Other life experiences that may have you thinking about a change in home base include:
- Job loss
- Pregnancy or childbirth
- Taking in an elderly parent
When you know your ‘why’
When you are taking on such a large responsibility you want to make sure you are solid in your reasons. Be grounded on why you want to purchase a home in the first place, why now and why that particular home.
“If it’s because you’re trying to keep up with everyone else, you probably want to reconsider,” said Minicozzi.
Instead, Minicozzi said, you should ask yourself what your long-term plan is for the home, as having a plan in mind may keep you from being swayed by outside influences or unexpected events. For example, what happens if you need to move for a new job opportunity? Will you keep the home, rent it out or sell it? Ask yourself the following questions to help pinpoint your intentions for the home:
- Is it a future rental property?
- Is this a starter home?
- Is this a forever home?
Consider sitting down with a loan officer who has experience with first-time homebuyers to discuss your options and help you figure out the price point and direction you want to go. In the meantime, take a good look at your budget, lifestyle and your long-term goals, and consider the differences between loan officers and mortgage brokers.
When you are preapproved for financing
Slow down on that online or in-person house hunting if you haven’t had that sit-down, Minicozzi said. “If you make an offer before you have your financing in place, it’s much harder to resolve any potential issues with your mortgage and close on time, and much more stressful for everyone involved.”
Without a preapproval letter, you may not have an accurate idea of what you will be able to afford or the type of loan you want to use to finance a home purchase. And in a competitive housing market, an offer without backing may be trumped by one that does.
Questions that need answers before you sign up for a mortgage
Make sure to you have a solid answer for the following questions before you cross the t’s and dot the i’s on a mortgage.
Can I afford the mortgage payment?
Ishbia recommends prospective buyers keep a ballpark monthly payment figure at top of your head.
“A lot of people get caught up on interest rates, but that’s just one part of the equation. You’ve got to think about the actual money that will be coming out of your pocket and make sure it’s something that works for you and your family,” said Ishbia.
You can get a sense of how much mortgage you’d be able to afford based on your income, credit score, down payment and other factors using LendingTree’s home affordability calculator. The best price protection is to shop around. Compare offers from different lenders and when you do, keep in mind the amount you ultimately can afford to pay each month.
Am I prepared for the auxiliary costs related to a homeownership?
The mortgage isn’t all you’ll be responsible for when you become a homeowner. There are other costs related to homeownership that you will be required to pay either upfront or eventually, like property taxes, homeowners insurance and general home maintenance costs.
Things like property taxes and insurance can be rolled into your mortgage payment. If the home you’re buying isn’t brand new, you may need to reserve funds to replace the roof or to make other general maintenance touch-ups to the property to keep it looking good.
There are other costs you may not account for, like dues paid to a neighborhood or condo association and increased utility bills for a larger space. If you have a lawn or backyard for the first time, for example, you may need to spend funds to hire lawn care or buy tools to maintain the landscape. Outside of maintenance, taxes and insurance, try not to end up house poor — when you spend so much on the home purchase and closing costs that you’re short on cash for everything else.
“Even after you buy the home, you may want to paint, buy furniture, etc., and those costs can quickly add up,” said Minicozzi.
Do (will) I have emergency savings?
Do you have enough money saved up to weather a financial emergency even after the home purchase? If you answered no, you may want to keep saving until you do.
Minicozzi said you should ask yourself this: If I get sick or lose my job, do I have enough to cover my mortgage for at minimum a few months, if not a year, before I am able to start working again?
A checklist for first-timers
If you’re a first-time homebuyer, educate yourself about the homebuying process prior to visiting a loan officer, or have a loan officer who has ample experience working with first-time homebuyers explain the process to you to help avoid surprises. Here are a few items to cover in the conversation.
What do I need to get preapproved?
No matter the type of loan you are using, a lender will use
- your debt-to-income ratio,
- credit score, and
- your ability to repay the loan to preapprove you for a mortgage
However, depending on the type of loan you want to use, you may be required to meet different income and credit score requirements.
A recent LendingTree study found credit history and debt-to-income ratio are the main reasons mortgage shoppers are denied loans. Together, they were responsible for more than half of denied loans. Generally speaking, you should aim for a debt-to-income ratio — the total amount of monthly debt obligations you have in relation to your monthly income — below 43% and a FICO credit score of at least 620.
If you need time to work on your credit score, take it — it may make a huge difference in the amount you pay for your home overall. LendingTree’s May 2018 Mortgage Offers Report found borrowers with scores between 620 and 629 paid about $35,700 more in interest over the life of a $236,697 mortgage loan compared with borrowers with scores 760 and higher.
Generally, borrowers with a low debt-to-income ratio, minimal financial obligations and excellent credit scores are more likely to qualify for the best mortgage terms.
Every lender uses its own calculation to determine your eligibility for a home loan and the mortgage payment you’ll be required to pay each month. Be sure to compare terms on as many preapprovals as you can before you decide which one to use.
Can I qualify for any programs to reduce my cost?
If you are buying a home for the first time, be sure to ask about the different types of loans available to first-time homebuyers. There are also many first-time buyer programs you might qualify for as well as assistance for making a down payment — often an obstacle for many borrowers.
Loans backed by federal agencies like the Federal Housing Administration, U.S. Department of Agriculture and Department of Veterans Affairs carry less risk to lenders so they can offer loans with competitive rates and looser qualification requirements.
USDA and VA home loans, for example, generally require no down payment. Additionally, borrowers with FICO scores as low as 580 can qualify to put down as little as 3.5% on an FHA loan, compared with the 20% down payment recommended to avoid paying mortgage insurance on most conventional mortgage loans.
It’s worth checking to see if you can qualify for any federal, local or nonprofit programs or grants that may help reduce your your out-of-pocket down payment cost, too.
What are closing costs?
You may be required to pay closing costs — the fees paid once the title is transferred over to the buyer — to seal the deal. Closing costs may also be called settlement costs.
“One of the biggest things first-time buyers are not aware of is how much it costs up front to buy a home outside of the down payment,” said Minicozzi, who added closing costs can fall between $6,000 and $7,000 or more in higher cost areas.
Closing costs are generally 2% to 6% of the mortgage amount and what you pay can vary widely between lenders. Costs may include some or all of the following line items:
- Loan origination fee
- Appraisal fee
- Discount points
- Title insurance
- Escrow fees
- Inspection fees
- Pest inspection fee
- Title insurance and title search fees
- Real estate commissions
- Lender fees like underwriting, processing etc.
You may also have the option to pay for property taxes and homeowners insurance — which aren’t necessarily closing costs but are related to homeownership — at closing, or have the fees rolled into your monthly mortgage payments instead. If you choose the latter, called impounds, the lender will place the funds into an escrow account so that when the they are due, your property taxes and homeowners insurance are paid.
The closing costs you will be responsible for should be listed in the Good Faith Estimate provided by the lender within three business days of submitting your mortgage application, and should be the same as the costs itemized on your final settlement statement (HUD-1 form).
How long should the process take?
Buying a home isn’t a quick process like getting approved for most credit cards or buying a pack of gum at your local corner store.
Minicozzi tells LendingTree the entire homebuying process may take up to three months for an average applicant with with good credit and a low debt-to-income ratio. She recommends you plan to take about two weeks to one month to get preapproved for a mortgage, and another two months to complete the closing process. So, shoot for about three months in total, although it could go by faster.
“That being said, the speed of the process rests heavily on the ability of the buyer to move quickly. The faster you send your loan officer the documentation and get your real estate agent your offer, the faster the process will go,” said Minicozzi.