Moving into your own place can be exciting and frightening at the same time. Consider these important questions when choosing your own home, and visit with your local American Federal Mortgage Banker to help you consider all your options.
How much money do you have saved up?
Start with an evaluation of your financial health. Figure out how much money you have for a down payment or deposit on a rental. Down payments are typically three to 20 percent of the price of the home. Security deposits on rentals are usually about one month of rent and more, if you have a pet. However, keep enough in savings for an emergency fund. It is a good idea to have three to six months of living expenses to cover unexpected costs.
How much debt do you have?
Consider all of your current and expected financial obligations, like your car payment and insurance, credit card debt and student loans. Make sure you will be able to make all the payments, in addition to the cost of your new home. Aim to keep total rent or mortgage payments, plus utilities, to less than 25 to 30 percent of your gross monthly income. Recent regulatory changes limit debt to income (DTI) ratio on most loans to 43 percent, according to the American Bankers Association.
What is your credit score?
A high credit score indicates strong creditworthiness. Both renters and homebuyers can expect to have their credit history examined. A low credit score can keep you from qualifying for the rental you want or a low interest rate on your mortgage loan. If your credit score is low, you may want to delay moving into a new home and take steps to raise your score.
Have you factored in all the costs?
Create a hypothetical budget for your new home. Find the average cost of utilities in your area, factoring in gas, electricity, water and cable. Find out if you will have to pay for trash pickup or home owner association fees. Consider the cost of yard maintenance, snow removal, and other basic maintenance costs like replacing the air filter every three months. If you are planning to buy a home, factor in real estate taxes and mortgage insurance. Renters should consider the cost of rental insurance.
How long will you stay?
Generally, the longer you plan to live in a home, the more it makes sense to buy. Over time, you can build equity in your home. On the other hand, renters have greater flexibility to move and fewer maintenance costs. Carefully consider your current life and work situation, your goals, and how long you want to stay in your new home.
For tips on improving your credit score, visit https://www.aba.com/Consumers/Pages/CreditScoreTips.aspx.
The Consumer Financial Protection Bureau has published a step-by-step guide to buying a home, titled “Your Home Loan Toolkit.” Visit https://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf
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