Purchasing a home is typically the biggest expenditure most Americans make. Homebuyers save for a few years and spend the next 30 paying it off.
This kind of investment should never be taken lightly, and it’s an intimidating task for many young Americans — which is a key reason many in the younger generation are choosing to rent rather than buy.
Still, home ownership can be the right move. It often saves you money when compared to renting. And, there’s the stability and freedom you have to create living space to your own liking.
So, when you’re mulling over the buy-or-rent question, it’s important to keep three questions in mind:
#1: Are You Financially Ready to Buy a Home?
This is a quandary facing many young Americans. But it doesn’t mean you should never purchase a home; just that perhaps you should wait a while before you do so.
Here are some financial details that potential homebuyers should prepare before diving in.
- The down payment: You can obtain an FHA mortgage with as little as 3.5% down or a conventional loan at 3%. You’ll face higher interest rates and lose more on interest payments in the long run, however. Ideally, you should put down between 10% and 20% to save on major costs. That’s usually tens of thousands most people don’t have lying around.
- Credit report: If you have bad or shaky credit, getting approved for a house will be tricky. Generally, any credit score below 620 is unlikely to land a loan. Most want to see a credit score of 675 or above, and people with 750 or higher will be automatically approved with the best interest rates. If your credit is bad, you’ll want to spend a few years improving it before jumping into home ownership. By law, you are allowed to get one free copy of all three credit reports every 12 months from each of the national consumer credit reporting agencies, Equifax, Experian and TransUnion.
- Personal debt: Carrying large amounts of credit card debt or personal loans will not only make it more difficult for you to get approved for a mortgage, but it will also affect your ability to make monthly payments. Most lenders won’t grant a loan if your debt-to-income ratio (including your mortgage payment) would exceed 45% of your income.
Anyone looking to purchase a home when their financial state isn’t ready should wait a few years until it is.
#2: Does the House Have Serious Damage (Or Potential for Damage?)
One of the greatest regrets that homebuyers express is after they’ve purchased a money pit. Some houses have more wear-and-tear or potential problems than others, which sets you up for years of pouring money into repairs.