A relatively strong job market means more people are earning a steady income. Typically that translates into more opportunities for homeownership and better access to mortgage credit.
If you are considering investing in a home this year, you’re not alone in your real estate ambitions. A recent National Association of Realtors® survey showed that 94 percent of renters under the age of 34 want to buy a home in the future. However before you take the leap, it’s important to evaluate the risks and rewards of homeownership.
- Can you afford to buy right now?
- What’s a reasonable timeframe to work toward purchasing a home?
- Do you know what neighborhood is the right fit for you or your family?
- Is it the right time, for both personal and financial reasons, to make the leap from renting to owning?
- Are there enough homes on the market to ensure you’ll find your dream property?
So how do you go about making the right decision and preparing a strategy to work toward owning a home? Consider a few things: criteria, timing and finances.
Determine your criteria
By this we mean, what do you really want in and from a home in the future? Are you seeing the investment as just that—a financial boon? Is the impetus to move predicated on a change in location? Do you need more space, a yard or a neighborhood closer to work or schools? Start by honestly answering these questions:
> What you can afford? Generally, you can afford a home equal to the value of two to three times your gross income.
> What’s on your home wish list? Prioritize important features such as number of bedrooms and baths, outdoor space, garage, proximity to neighbors, etc.
> Where do you want to live? Try to narrow your search to three or four ideal neighborhoods, taking into account lifestyle amenities including schools, recreational facilities, area expansion plans and safety.
> Time up your home search While it’s easy and fun to get excited about the prospect of owning a home, often buyers get ahead of themselves and jump into what might end up being a poor decision. Instead, slow down and evaluate the timing of your big purchase. We promise there will be another house available in the future like the one you fell in love with online.
Timing up the purchase of a home should factor in potential disruption to your family, such as the need to switch schools midyear because of a move. A current lease expiration date is also something to consider. Can you easily get out of your lease or can you shift to month-to-month contract as you get closer to buying a home?
The current economic climate may also play a part in smart decision-making. For example, the Federal Reserve just raised interest rates. While mortgage rates remain historically low, you can expect a gradual increase in borrowing rates as the economy improves and the Fed plans future rate increases. Rental prices are also historically high. Maybe your rent is about to go through the roof. This might also be a smart time to get out from under a lease and into a long-term investment in a home.
Seasonality is also a concern when buying a home. There is traditionally more home inventory in warm-weather months, especially when pent up homeowners have prepared their properties for a bustling spring market. However sometimes there are better deals to be had during tight-supply times, such as the depths of winter. That said, despite a rebounding economy and falling unemployment rates, which traditionally brings people back into the housing market, home supply hasn’t exactly kept up with demand, so many markets are reporting year-round shortages.
Review credit, debts and income
Now the financial piece of buying a home: Do you have enough money saved to qualify for a mortgage and cover your down payment? It’s ideal to have 20 percent of the purchase price saved as a down payment; however, a down payment can often be much less of a percentage, depending on the lender. Also, don’t forget to factor in closing costs, including taxes, attorney’s fee and transfer fees, which average between 2 and 7 percent of the home price. Start with these steps:
> Get your credit in order. Obtain a copy of your credit report, which provides a history of your credit, bad debts and any late payments. Make sure your credit report is accurate or correct any errors immediately.
> Determine your mortgage qualifications. How large of mortgage do you qualify for? Also, explore different loan options—such as 30-year or 15-year fixed mortgages or ARMs—and decide what’s best for you. Don’t forget to factor in debt. A large student loan, for example, will add to your debt-to-income ratio, which reduces the amount of additional debt a mortgage lender can let you take on.
> Get pre-approved. Organize all the documentation a lender will need to pre-approve you for a loan: W-2 forms, copies of at least one pay stub, account numbers, and copies of two to four months of bank or credit union statements.
Even without perfect credit or with heavy debt, there are pathways to home ownership. For example, there are low down payment (as low as 3 percent) programs in which conventional mortgages are backed by government-sponsored enterprises. Last year the Federal Housing Administration also offered a 50-basis point decrease to help buyers achieve homeownership through lower mortgage-insurance premiums on FHA loans.
Think you’ve got the right strategy for achieving homeownership? See what you can be doing to increase your chances of finding your dream home—sooner than you thought possible. Call a qualified realtor at Rize Homesource today.
– by Niko Kambouris, Rize Homesource Realtor