READY TO COMMIT 8 signs you’re prepared to stop renting and buy a home
Another thing lenders look at when screening mortgage applicants is their debt-to-income ratio, or DTI. This is a key metric that’s calculated by adding up all monthly debts, then dividing the sum by your gross monthly income. The higher your DTI ratio, the more risk you pose to a lender.
Some conventional loans allow a DTI ratio of up to 50%, but many lenders prefer a ratio of no more than 43%. If you previously had a high DTI ratio and have since paid off some high balances, you’ll be in a stronger position to get a mortgage.
“Keeping credit card balances low and debt under control is beneficial in many ways,” McClary says. “It’s important to consider that keeping credit card balances at or below 30% of the available credit limit has a positive influence on the credit score.” taxes, routine maintenance and homeowners insurance.
That’s not the case when you own a home. All those costs are your responsibility. If your income has risen or you’ve been able to set aside savings, you might realize you have enough extra money to handle the added expenses of homeownership.
“Clearly, if you put everything you have into the down payment and such to buy a house, then you have no money to do repairs should they come up,” Golden says. “You’re better off spending less on the house so you have some money to make improvements and repairs.”
“First-time homebuyers don’t have proceeds from another home to help fund the down payment. It’s one of the main reasons why the down payment is the biggest hurdle to homeownership,” says Rob Chrane, CEO of Atlanta-based DownPayment Resource, which finds programs that help people buy homes.
The down payment requirement depends on the type of home loan you get.
For conventional loans, 20% down is usually required if you want to avoid paying private mortgage insurance, or PMI.
Some mortgages insured by the Federal Housing Administration, known as FHA loans, require just 3.5% down. Fannie Mae and Freddie Mac back some mortgage products that require just 3% down; and loans guaranteed by the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture require no down payment.
Renters interested in buying a home should compare loan programs to see which one is best for them. In addition, there are grants and programs to help homebuyers with down payments.
Another expense you have to be ready for is the closing costs, which typically equal 2% to 7% of the property’s sale price. The good news is that some closing costs are negotiable.
Many renters decide to purchase a home after a major life event, such as getting married, says Henry Yoshida, a certified financial planner and CEO of Rocket Dollar, a Texas-based provider of self-directed retirement accounts.
Marriage, a growing family, a new job and children leaving the nest are catalysts for people to buy a home.
“The four major cities in my home state, Texas, are simultaneously on top 10 lists for raising a family and retiring, so I see this firsthand,” Yoshida says. “My own neighbors on either side are retirees from California and a young family who relocated from the Northeast for a job.”
It’s smart to have a good idea of the area or neighborhood you want to live in and the type of home you want before you begin your quest. Houses, townhouses, condos, coops, duplexes — there are lots of options out there, and each one has its own considerations for costs, upkeep and personal enjoyment.
Determine what you need and what is most important to you.