Should You Look for Your First House Or Keep Renting?

Tired of working so hard just to build your landlords equity instead of your own? Been dreaming about paint swatches and obsessing over Pinterest projects? Making that leap from renting to owning a home comes with many perks -- both financial and emotional. And even though home ownership comes with great responsibility, you might be surprised how achievable it can be.

Certainly, the best time to trade security deposits for a down payment is different for everyone. If youre thinking about switching from renting to owning, ask yourself these five questions to decide if youre ready to embark on the home ownership adventure.

Lets not beat around the bush: Buying a home requires a substantial financial commitment.

Theres the down payment, of course. On average, you want to have a minimum of 5% to 7% of the cost of the home youre targeting, says Jason Harriman, a REALTOR(R) with San Antonio-based Heyl Real Estate Group at Keller Williams Realty. Then, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

Tip: Keep in mind if you put down less than 20%, youll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, its about 50 to 200 a month. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 -- but the most competitive interest rates will be offered to those with a score of 700 or above. So if you havent started practicing those good credit habits yet, its time to start developing them.

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much youre paying out to other lenders. Ideally, a borrowers debt-to-income ratio -- how much you pay toward debt each month divided by your gross monthly income -- should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesnt exceed 43%.) If yours doesnt, think about how you can get that debt needle moving in the right direction.

The best way to do this is to pay off any unsecured debts like credit cards and personal loans, and keep them as close to a zero balance as you can, says Harriman.

2. Are You Prepared to Make Compromises?

Kathleen Celmins, who manages the personal finance site Stacking Benjamins, was financially prepared to manage a mortgage. But once the house hunting began, she quickly realized she was priced out of the homes she had envisioned for herself.

I originally wanted a single-family home with a yard and in a great neighborhood, she says. But given her price point, the homes she could afford ended up being in, well, not the greatest neighborhoods. At one point, we looked at a property that was directly behind a strip club, she laughs. We didnt even go inside.

After several weeks of searching, Celmins realized she needed to find a middle ground. In my price range, I could get a not-so-great house in a not-so-great neighborhood. Or, I could get a really cute condominium with a gas range and granite countertops, she says. It was something I compromised on. I gave up a yard for having fancy stuff in my condo.

3. Are You Emotionally Ready?

When it comes to renting, surprises dont require much emotional investment. The rent goes up? You can move. The fridge is on the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, its time to start reading Yelp reviews. And if property taxes unexpectedly rise, its on you to appeal or pay up.

My homeowners association fee doubled in the first year I owned my condominium, says Celmins. Then my real estate taxes were reassessed. My mortgage payment went up and I panicked. I didnt even know that could happen.

Of course, having the financial flexibility to cover those unexpected things is important, but dont overlook the importance of having the mental and emotional capability of dealing with them responsibly when they arise. Everything could be peachy for months, and then three maintenance issues might spring up in the same week. Stress management and problem solving skills are home ownership biggies.

4. Will Owning Pay Off in the Long Run?

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you dont, theres still the financial advantage of building equity in your home, instead of lining your landlords pockets.

5. Has Your Lifestyle Outgrown Renting?

Many people find a rental can only take them so far. When youre ready to start a family, youre going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for Junior to play or for a dog to scamper around. And speaking of Fido, the vast majority of renters have trouble finding a place that will allow for their pet. Home ownership can end that stress for good.

Then there are the renovations. If youre itching to test out your DIY skills and personalize your space, youre probably ready to own. Landlords who allow property renovations -- especially DIY projects -- are few and far between.

Buying a first home is a big change -- both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make. Turns out its awesome, said Celmins. I love it so much.


Alaina Tweddale is a freelance writer who writes about money, home, and investing. Her work has appeared on Forbes.com, the Huffington Post and Time.com. When shes not writing, shes working with her husband to slowly renovate what seems like every square inch of their home.

Categories: Home Buying
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