First time home buyers have a lot to consider when making the decision to rent or buy a home: interest rates are at all-time lows, there's still plenty of housing stock and prices are at or near their lowest in years. Still, deciding whether to buy a home or rent an apartment can be a complicated decision. How do you know what's right for you? Potential buyers should ask themselves several key questions before making this important decision.
What price range should I look to buy in? As a good rule of thumb, you never want your monthly mortgage costs (including any monthly HOA fees) to exceed one-third of your gross monthly income. Most lenders won't even approve buyers much beyond this range, as they've learned in the past that it becomes extremely difficult for buyers in that type of scenario to meet their monthly payments. So when starting to consider what price range, use a handy online calculator to get a ballpark estimate of what a typical payment would look like.
What other costs are associated with owning a home? The main costs you'll have to worry about as a homeowner that typically don't apply to renters include annual property taxes, monthly HOA fees (if your neighborhood requires this), and typically all monthly utilities and expenses for repairs. Depending on your lease, you may currently not be paying for all utilities that you may utilize (electricity, gas, water, sewer, trash service, grounds maintenance, internet, cable, etc.). It's important to take a good look at your monthly utility expenses currently, and compare those to potential houses you may find to buy. If your monthly mortgage payment is reduced by $200 a month but your utilities and fees increase by $250, you may want to look at other houses, or considering continuing to rent. Don't also forget to budget in a one-time cost associated with moving!
I just signed a new lease for the next 12 months, but I want to consider buying. Is this a good idea? This will depend on your lease with your landlord. If there is any language in your lease that discusses what would happen if you break your lease early, make sure to review this thoroughly before deciding to buy a house. Sometimes it can be very costly to break a lease early, and other times, landlords are flexible. If you're unsure, or there isn't a section in your lease distinctly describing early termination of the lease, be sure to talk to your landlord and find out.
What if I plan to move again in the next year or two? If you know you'll have to move again in less than five years, it's unlikely that buying would be the right choice for you now. Home buying is a great long-term investment, but you really don't start to build any equity before five years in. If you know, or think it will be likely that you will need to move in less than five years, hold off on buying for the moment.
What credit score would I need to qualify for a loan? Much of this will depend on the lender you use, and the different programs that they offer. It's always a good idea to shop around -- always talk to at least three different mortgage loan officers before deciding to commit to a specific loan. Details aside though, most people who have what is considered "decent" or better credit have a better shot at obtaining a loan. Where you credit score really comes into play is in the interest rate that you would be charged. The higher your credit score, the better qualified you appear to a loan officer, and therefore the better the rate they can offer you.
What if I don't know my credit score? Any lender you work with can help obtain this number for you. Our mortgage partners at Home Mortgage Alliance can also help work with you to get your credit score where it needs to be if you're falling a tad short.