With rent prices increasing all over the country, now may a good time to make the leap from ‘renter’ status to ‘owner’.
After all, why not put that monthly check towards your own equity rather than someone else’s? And the prices that landlords are charging these days for rent are often higher than a typical mortgage payment!
But once you’ve made the decision to forego renting in favor of buying, you’ve got to do things properly from the get-go. A home purchase is a major decision, so you want to be sure that you’ve considered every angle to make sure the choice is the right one for you.
Understand the Issue of Mobility
If there’s one benefit of renting, it’s the mobility and flexibility that typically comes along with it. Once your term date has come and gone on your rental agreement, you can literally pick up and move to a new location much faster if you rent instead of own.
On the other hand, if you’ve got to sell, there will be a lot more on your plate in terms of all the legalities and financials that you have to deal with. While this isn’t usually a problem for many, it’s something that you need to understand before you make the transition.
Consider the Long-Term Benefits of Owning
Perhaps one of the biggest benefits of owning property is the long-term equity and wealth that it can help you accumulate. In fact, this is probably THE biggest advantage from a financial standpoint.
Every month that you make a rental payment, who’s pockets are you filling?
But if you’re paying a mortgage on your own property, the principal portion of every mortgage payment you make goes directly towards building equity in your home. And not only do you build equity by directly feeding into it with your money, you’re also building it with appreciation over time.
Of course, the exact amount that your home will be worth at any given point in the future will depend on that current housing market and the condition of your mortgage. But if you’ve been making regular payments without excessive leveraging to obtain financing, and the market is in decent condition, you can be looking at considerable gains.
Team up with a real estate agent, do some homework, crunch the numbers, and be practical about the prospective future value of your property.
Get Your Credit in Order
Don’t start pounding the pavement looking for a house just yet until you’ve looked into the state of your credit. Lenders aren’t going to hand out a mortgage to just anyone, including those who have a poor credit score on their records.
Basically, the higher your credit score, the better the odds of getting approved for a mortgage, and the lower the interest rate you’ll likely be offered. Usually, anything above 680 is what lenders are looking for.
But you’re not going to know what your credit score is until you pull your credit report. If your score isn’t as high as you’d like to to be, scan the report with a fine-tooth comb to check for any errors that could be bringing your score down. If you spot any, make sure you report these to the credit bureau right away to be investigated.
There are plenty of things you can do to improve your credit score, which should be done sooner rather than later. Don’t make any large purchases on credit, and don’t apply for any new credit cards. Make sure any loan payments you are currently responsible for are paid on time and in full every month so you don’t cause any further damage.
Within a few months of practicing these efforts, you should see an uptick on your credit score which will put you in a more favorable position to get a decent mortgage package.
Sort Out Your Finances and Get Pre-Approved For a Mortgage
How much debt are you currently drowning under? How much money are you actually taking home in income? Before you start dreaming of home ownership, you need to get a handle on your finances and identify exactly what financial position you’re in first. Lots of first-time homebuyers make the mistake of house-hunting without understanding whether or not their current finances can support this purchase.
It’s always a good idea to meet with a mortgage broker before checking out any listings to see what mortgages and interest rates you can realistically and comfortably afford. That’s where a mortgage pre-approval can come in really handy.
A pre-approval will give your mortgage specialist an opportunity to check out your credit history and determine whether or not you’d be a candidate for a home loan. Sure, you’ll have to fill out applications and submit a bunch of forms. But by the end of the process, you’ll know whether or not you’d be able to get a mortgage, and how much a lender would be willing to loan you.
This, in turn, will give you a clear idea of the price range of homes that you’ll be able to afford. There’s no sense looking for homes in the $500,000 range when you can only afford those in the $300,000 price bracket.
Shop Within Your Budget So You Don’t End Up ‘House Poor’
The last thing you want to do is dump a big chunk of your paycheck into your house. Financial experts recommend that homeowners shouldn’t be putting any more than 30% of their monthly income towards their mortgages in order to live comfortably and enjoy other aspects of life without drowning in loan payments.
Consider what percentage of your income you’d be comfortable putting towards your mortgage, and don’t go over that number.
Factor in Costs Aside From the Purchase Price
Once you buy a house, you’re no longer just responsible for the rent. The closing of the house purchase itself will come with added costs, such as home inspections, appraisals, commission fees, moving costs, and title insurance. And once you get the keys, you’ll now be paying for things like utilities, property taxes, insurance, and any fees related to repairs and maintenance.
The Bottom Line
These tidbits of info aren’t meant to scare you. Instead, they’re meant to adequately prepare you for the responsibilities of homeownership. Get your credit in check, and get your finances in order. Put a team together that includes a profession real estate agent and experienced mortgage broker who can help you get ready for your new role as homeowner. Lean on their expertise to help you put your best foot forward in the world of homeownership.