Barbara D. Guise | Posted on Jun 01, 2016
Owning a home is a great investment. But, before jumping into the market, it's critical to consider the costs involved and budget accordingly to ensure you're able to meet all of your financial obligations. Consider these five important questions before beginning your housing quest.
- How much money have you saved?
Start with an evaluation of your financial health. Determine how much money you have for a down payment on a home purchase or deposit on a rental. Down payments are typically 5% to 20% of the price of the home. Security deposits on rentals are usually about one month of rent, and more if you have a pet. Your savings strategy should include an emergency fund that contains enough money to cover three to six months of living expenses due to unexpected costs like a major car repair, the loss of a job, or other situation.
- How much debt do you have?
Consider all current and anticipated financial obligations such as a 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 the total rent or mortgage payment plus utilities to less than 25% to 30% of your gross monthly income. Recent regulatory changes limit the debt-to-income (DTI) ratio on most loans to 43%.
- 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. For tips on improving your credit score, visit www.aba.com/consumers.
- Have you factored in all the costs? Create a hypothetical budget for your new home.
Find the average cost of utilities in the area, factoring in such items as gas, electricity, water and cable. Find out if you will have to pay for parking or trash pickup. Consider the cost of yard maintenance and other expenses like replacing the air filter every three months. If you are planning to buy a home, factor in real estate taxes, mortgage insurance, and possibly a homeowner association fee. 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 expenses. Carefully consider your current life and work situation, and think about how long you want to remain in your new home.
Take the time to carefully review your overall financial picture and answer these five important questions before buying or renting your first home. The American Bankers Association promotes American Housing Month in June and provides a variety of helpful resources for new and experienced homeowners. Visit www.aba.com/consumers for additional information.