What first-time buyers should know about the process and how they can find out if they’re ready to become homeowners
Buying a new home is a monumental step in life. For many, this decision marks the end of renting from month to month or year to year, replaced instead by a long-term commitment to a neighborhood, a city, and a place to call home. Yet everyone’s situation is different, so while some may be ready to jump into homeownership, others may not.
Read on to learn how you can assess whether you’re ready to move into a new home or if you still have some work to do.
Four Questions Everyone Should Ask Themselves Before They Buy a Home
Not every renter is ready to become a homeowner. That’s okay—we’re all at different stages in our lives and move at different paces. But, if you’re thinking about making the leap to homeownership, first ask yourself the following questions:
What does my monthly budget look like?
Conventional home loan lenders review applicants’ income and the likelihood they’ll be able to pay off a mortgage. To establish consistency, lenders typically outline an income range to help them evaluate loan candidates.
Other lenders don’t specify a range but do examine an applicant's various income streams. For example, when reviewing loan applications, Fannie Mae reviews the following sources:
- Base pay (salary or hourly) income
- Bonus and overtime income
- Commission income
- Secondary employment income (from a second job or multiple jobs).
What do my loan payments look like, including car loans, student loans, or credit cards?
People with larger debts may find it more difficult to be approved for a home loan, especially if they struggle to meet regular payments on these other loans. This affects your credit score, which can directly affect your home loan eligibility and interest rates on a mortgage.
Do I have money saved for a down payment or reserves?
Down payment costs can add up quickly. Not to mention that, per Investopedia, the less you pay toward your down payment, the higher your fees and interest payments over time. In effect, putting a greater percentage of the home’s cost down when you make the purchase can save you money over time.
Can I pay a mortgage every month, plus additional costs?
Budgeting is essential when deciding if you’re ready to buy a home. If you’re unable to make a mortgage payment each month, you probably aren’t ready to own a home.
Chase Bank points out that borrowers should follow the 28% rule, meaning that your mortgage payment—including principal, interest, taxes, and insurance—shouldn’t exceed 28% of your monthly gross income. In other words, to figure the max mortgage payment you can afford, multiply your monthly gross income by 0.28.
Note: This content was developed in collaboration with First Choice Lending Group.
How to Make the Move from Renting to Purchasing a Home (If You Aren’t Quite Ready)
Even if you aren’t ready to buy a home just yet, but you’d like to in the future, you can position yourself to become a more attractive home loan candidate with some planning and strategizing.
If this fits your plans, you can use the following tactics to better position yourself to go from renting to buying a home:
Boost Your Credit Score
Investopedia defines a credit score as a numerical value that illustrates a person’s creditworthiness. Scores range from 300 to 850, with higher value relating to a more trustworthy loan candidate.
Credit scores are decided by a person’s credit history, which includes the number of open accounts, the amount of debt owed, payment history, length of credit history, and types of credit used. Higher credit scores typically mean lower interest rates as well.
People can take several steps to boost their credit scores. Per Nerdwallet, some of the best ways to raise your credit score quickly include paying off credit cards strategically, asking for credit limit increases, paying your credit cards on time, disputing errors, and plenty more.
Figure Out Your Debt-to-Income Ratio
The debt-to-income (DTI) ratio is calculated by taking a borrower’s total monthly debt obligations and dividing that figure by their monthly gross income. This value is used to decide the size of a monthly payment and the maximum sales price for which a client may qualify.
To get started, use the DTI calculator tool from Wells Fargo, which is free and easy to use. Not only will this tool find your DTI, but it will outline any next steps that need to be taken based on the calculated rate.
Attend Homeownership Prep Classes
While searching the internet for advice can be helpful, it never hurts to learn from the experts. It’s incredibly common for major mortgage providers in the U.S. to offer first-time homebuyer education courses (or partner with an organization that does this on their behalf).
In some cases, these classes cost money to attend. For example, Debt.org compiled a list of four of the most popular courses available to homebuyers. However, there are also plenty of no- or low-cost education resources available as well.
Bella Vista Homes partners with Operation HOPE to equip young people and adults with the ﬁnancial tools and education to secure a better future. Topics include everything from credit and money management to first-time homebuyer workshops and more. Sign up for these free, virtual programs here.