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Should You Look for Your First House Or Keep Renting?

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5 key questions to ask yourself before buying a home.

Tired of working so hard just to build your landlord’s equity instead of your own? Making that leap from renting to owning a home comes with many perks — both financial and emotional. And even though home ownership comes with great responsibility, you might be surprised how achievable it can be.

Certainly, the best time to trade security deposits for a down payment is different for everyone. If you’re thinking about switching from renting to owning, ask yourself these five questions to decide if you’re ready to embark on the home ownership adventure.

1. Are You Financially Prepared?

Buying a home requires a substantial financial commitment.

There’s the down payment, of course. On average, you want to have a minimum of 5% to 10% of the cost of the home you’re targeting. Plus, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

 Keep in mind if you put down less than 20%, you’ll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it’s about $50 to $200 a month. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 — but the most competitive interest rates will be offered to those with a score of 700 or above. So if you haven’t started practicing those good credit habits yet, it’s time to start developing them.

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you’re paying out to other lenders. Ideally, a borrower’s debt-to-income ratio — how much you pay toward debt each month divided by your gross monthly income — should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesn’t exceed 43%.) If yours doesn’t, think about how you can get that debt needle moving in the right direction.

The best way to do this is to pay off any unsecured debts like credit cards and personal loans, and keep them as close to a zero balance as you can.

2. Are You Prepared to Make Compromises?

If you are financially prepared to manage a mortgage, but once the house hunting begins, you quickly realized you are priced out of the homes you had envisioned for yourself.

You  need to find a middle ground. If in your price range, you could get a not-so-great house in a not-so-great neighborhood, or you could get a really great condominium with a gas range and granite counter tops, this might be something you might want to compromised on as a first step to ownership.

3. Are You Emotionally Ready?

When it comes to renting, surprises don’t require much emotional investment.  The rent goes up? You can move. The fridge is on the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, you need to fix it. And if property taxes unexpectedly rise, it’s on you to appeal or pay up.

Of course, having the financial flexibility to cover those unexpected things is important, but don’t overlook the importance of having the mental and emotional capability of dealing with them responsibly when they arise. Everything could be peachy for months, and then three maintenance issues might spring up in the same week. Stress management and problem solving skills are home ownership biggies.

4. Will Owning Pay Off in the Long Run?

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you don’t, there’s still the financial advantage of building equity in your home, instead of lining your landlord’s pockets.

5. Has Your Lifestyle Outgrown Renting?

Many people find a rental can only take them so far. When you’re ready to start a family, you’re going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for children to play or for a dog to scamper around. And speaking of pets, the vast majority of renters have trouble finding a place that will allow for their pets. Home ownership can end that stress for good.

Then there are the renovations. If you’re itching to test out your DIY skills and personalize your space, you’re probably ready to own. Landlords who allow property renovations — especially DIY projects — are few and far between.

Buying a first home is a big change — both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make.

Courtesy of House logic, made possible by Realtors

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