Many people consider buying a home a rite of passage. But how do you know when it’s your time? Ultimately, that is the essence of the starter home debate: when should you buy real estate?
It’s All About the Money — Mostly
Let’s say you’re renting a place and the landlord hits you with a rent increase. You look at the new amount and think, “Goodness, that’s a mortgage payment.” Now the wheels are turning. But before they turn too far too fast, know you’ll be looking at additional expenses if you choose to buy a home instead of renting. These can include property taxes, mortgage insurance and HOA fees, along with maintenance costs, water usage and garbage collection. If your budget can swing all of that, you might be in the running. But wait…
The Down Payment
Coming up with the down payment cash takes most people out of the game. If you’re buying a home and you want the best interest rate on the loan you’ll need to get it, you’re looking at handing over 20 percent of the purchase price. If it’s a $200,000 home, you’ll need $20,000 in cash just to get the party started. Oh, by the way, there are also these things called closing costs that will typically require you to come up with another three percent of the purchase price, also in cash. Fortunately, there are ways to swing a buy without the full 20 percent, although they are more expensive in the long run. But hey, if that’s not an issue either, you’ve still got a shot. Unless…
Debt-to-Income Ratio
To qualify for a home loan, you have to be able to demonstrate to the lender you can afford to make the payments comfortably. Most financial institutions make this determination by measuring the monthly payment against your total monthly income. If the payment comes to less than 28 percent of your pre-tax income and all of your other debts — like credit cards, car loans and homeowners insurance rates — comprise less than 36 percent of your pre-tax income when combined with the mortgage, you’re still looking good. However,…
Credit Rating
Bad debt will come back to haunt you when you try to buy real estate. If you have some and are in a position to pay it off, that’s great. But know it will have already impacted your credit score negatively. Cheer up though, a less-than-pristine credit score won’t disqualify you; it’ll just mean you’ll pay a higher interest rate to get the loan. However, this will make your monthly payment higher, which will make your debt-to-income ratio higher, which could make it more difficult to show you can pay back the loan. But if that’s not a problem either, you’re pretty much relaxing in your new home. FYI – if you’re a european reader, don’t forget you’ll need a “trust deed”. If you’re in Scotland, check out: Scottishtrustdeed.co.uk, they might have a product that will help you.
Commitment/Responsibility
When you buy a house, you’re committing to putting down roots and becoming part of a community. There’s a certain permanence implied, one underpinned by a willingness to take on the responsibility of maintaining the home, as well as your relationship to the neighborhood. Because the financial outlays are so significant, you should be prepared to live there for quite some time. When you do get ready to move, you’ll have to either become a landlord, or sell the house. Either way, in exchange for homeownership, you’ll give up a measure of flexibility. Now, if that isn’t a problem for you either, congratulations, you’ve just won the starter home debate. And yes, this is when you should buy real estate.
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