Are you still renting? Have you set your sights on buying, but given up for fear you can’t afford it?
Truth is, you may be in a good position to buy and you don’t even know it. Whether you hope to become a homeowner now or in the near future, here’s a checklist to begin determining your readiness to buy.
While job security and steady income are key when applying for a mortgage, if you’re self-employed or have other sources of income there are loan programs that take this in to account. Ideally, your monthly costs should be no more than 29% of your gross household income. For example: If you make $45,000 per year ($3,750 per month) $1,087.50 would be the most you’d want to pay monthly.
Just because you have some debt doesn’t mean you can’t afford to buy a home. The key is to properly manage debt, as it has a direct impact on your credit score. To determine your debt-to-income ratio, divide the amount of debt you pay monthly by your gross monthly income. Ideally, your total housing costs and debt should be no more than 36% of your gross income.
Your credit score is a reflection of your ability to pay. A higher score usually gets you a better interest rate and plays a key role in determining the mortgage loan programs for which you qualify. A score of 500 tells the lender there is a 50/50 probability you’ll repay your loan. While a score of 700, a 70/30 probability, tells the lender there’s less risk you’ll default on your loan. Your score is determined by five factors. Each has it own particular weight which totaled, equal your credit score:
- Your payment history: 35% – Do you have missed or late payments? Or do you always pay on time?
- Credit utilization: 30% – How much of your available credit has been borrowed?
- Length of your credit history: 15% – How long have your lines of credit have been open? And how recently were they used?
- New credit: 10% – Have you recently opened a new line of credit — or many lines of credit in a short amount of time?
- Types of credit: 10% – Do you have a good mix of different types of credit like credit cards, student loans, and auto loans?
In order to improve and maintain a good credit score, be sure to pay all of your bills on time and pay off any bills in collection. Don’t consolidate debt by opening new credit card accounts and don’t close older credit card accounts that contribute to your overall credit history. Lastly, check your credit annually and be sure to correct any inaccuracies by contacting the three major credit agencies — Experian, Equifax, and TransUnion — directly.
Many people believe that it’s necessary to put down 20% of the total cost of a home as a down payment. While 20% is ideal, there are loan programs — particularly through the Federal Housing Administration — that allow as little as 3.5% down. There are also down payment assistance programs available for first-time homebuyers through a number of sources.
Rent vs. buy calculator
Get an even clearer picture of whether you may be in a good position to buy a home — use our online calculator that lets you compare your cost of renting vs. buying.
As a condition of your lease, your rent can change at the end of each term. So, why pay your landlord’s mortgage when you could be paying your own — especially when there are so many other advantages to owning a home.
- Owning your own home is an investment that usually increases over time
- You can borrow against the equity in your home by refinancing to lower your interest rate and monthly payment, to consolidate debt, make home improvements, pay tuition, and cover medical or other costs in an emergency.
- Homeowners may enjoy a yearly mortgage interest tax deduction, a more manageable cashflow, as well as the pride of ownership and a chance to be a member of the local community.
Don’t count yourself out. You may be surprised to learn you can afford a home of your own — sooner rather than later. To get a better understanding of your credit score and financial situation, as well as alternative loan and down payment assistance programs, contact your local Embrace loan officer. The call is free and there’s no obligation.