There are valid reasons to delay home ownership, but there are also many misconceptions that may be holding you back.
Of course, every situation is different and Lincoln Lending cannot give financial advice. But there are several things to consider when making a home buying decision.
- How do you know if you're ready to buy? Is it smarter to keep renting for a while?
- What is included in monthly mortgage payments?
- What are the other responsibilities and costs involved in owning a home?
- Can I afford it, and would I even qualify for a home loan? Is my credit score good enough?
- How long does it take to buy a home? When should I start planning?
Renting vs. Buying
First, look at your budget and what you are paying now to rent a home or apartment. Monthly mortgage payments may be less than what you are spending on rent.
Are you planning to stay put? If you think you might be moving soon, renting is probably a better option. But if you plan to stay in the area for a couple of years, buying could be a good option.
What are your personal goals? Do you want to travel or are you planning to settle down and start a family? Could your job require a relocation in the near future? Do you want more backyard space for kids, pets or cookouts with friends? Carefully consider your values, goals and plans to help you make the right decision
Looking into purchasing your first home?
You’re Just Not Sure You’re Ready to Buy
Down payments and closing costs can be an obstacle, especially for first-time home buyers. Talk with your lender about down payment options and ways to potentially reduce your closing costs.
If your credit score is not good enough now, talk with your lender about how to improve it for the future. You can also discuss your work history and the role it plays in getting approved for a loan. Maybe you need a little more time on your job, or maybe you need to be sure your position is stable before investing in a home.
Finally, think about your lifestyle. Are you ready to take on the responsibilities of owning a home? Or do you like having an apartment maintenance team ready to handle repairs? Do you love the apartment pool, or is it more important to have a fenced yard for the kids? These are all factors to consider.
Our clients often tell us they decided to buy because they:
- Want to build equity in something instead of feeling like they are throwing money out the window.
- Like the flexibility of being able to customize their home & landscaping.
- Don’t like having a landlord telling them what to do. They want to make the home fit their lifestyles.
- Are now in a stable situation and don’t plan to move for a while.
What is Included in Monthly Payments?
The length of your mortgage will impact your monthly payment amount. A 30-year mortgage usually has a higher interest rate, but lower monthly payment. A 15-year mortgage will likely have a higher monthly payment, but you spend much less in interest long-term.
Also consider the cost of mortgage insurance and homeowners insurance. Utility costs and a home maintenance budget are also factors in your monthly expenses.
Finally, consider the costs of setting up a house. Will you need to purchase appliances, lawn equipment, shower curtains, drapes or furniture? These should be included in your budget planning.
The Responsibilities of Owning a Home
When buying your first home, you may consider all the initial costs of the mortgage, down payment, moving expenses, etc. But there are also ongoing responsibilities to include in your planning.
There are financial considerations like property taxes, insurance and homeowner’s association dues.
Also think about maintenance costs. A home inspection can catch many important items a home buyer may not see. But owning a home also means being responsible for repairs, from a loose doorknob to roof damage.
Think about the costs of items you may need to replace in the home. Will you need new appliances, a fence or storage shed? Will you need to replace window coverings or buy a lawn mower?
Am I Even Qualified to Buy a Home?
Home loan programs vary widely and each one has its own requirements. Lenders look at lots of factors, but your credit score, debt-to-income ratio and down payment / closing cash are all key.
Mortgage loan programs usually require a minimum credit score of 580, however there are a couple of programs that allow lower scores in certain cases. For example, an FHA loan requires a 530 minimum credit score and the HUD-184 Native American loan has no minimum credit score if you meet other program qualifications.
Your debt-to-income ratio (DTI) is how much money you earn vs. your existing monthly expenses. Mortgage lenders usually want your overall mortgage payment -- include taxes, insurance and private mortgage insurance (PMI) -- to be less than 27% of your gross monthly income. And they like to see that your mortgage payment plus monthly debts are less than 41% of your gross monthly income. But this is not always required. Talk with your lender about your specific situation.
Most programs also require a down payment and there are other out -of-pocket expenses required when you close on your home. This includes inspections, appraisals, taxes, insurance, etc. Your lender can discuss alternatives.
How can you prepare for home ownership?
Can I Afford to Own a Home?
A good general rule is to try not to spend more than 30% of your gross monthly income on housing, including utilities.
Also consider the costs of a down payment, closing costs and prepaids. These are the out-of-pocket expenses you will be required to pay when closing on your home. It includes appraisals, taxes, insurance, etc.
Think about the type of house you want and your preferred neighborhood. We often encourage first-time buyers to consider homes that are a little smaller or less expensive than you think you need now. Then you can use the extra money to pay off debt and build up equity toward a bigger or more expensive home.
About Credit Scores
Almost all loan programs have minimum credit scores. They can range from 300 to 850. The higher the score, the more confident a lender can be that the borrower will be able to repay a loan.
Buyers should be prepared to have at least a 580 score for government programs and a 620 score for a conventional mortgage. However, one loan program allows credit scores as low as 530 and a couple of programs even allow zero scores under certain special circumstances.
If you apply for a home loan and your score is just not high enough now, you can work to improve it to prepare for future home ownership. While this is different for every person, it usually helps to pay down credit card balances, keep them low and make payments on time.
The Steps to Home Ownership
There are several steps in the home buying process, and it starts by getting prequalified for a loan. This will help you estimate your monthly payments and determine how much you can afford to spend on a home.
After you are prequalified, you can do preliminary searches online and contact a realtor. The realtor can review your needs and show you properties that aren’t on the internet. When you find your home, you’ll sign a contract and work with your realtor and lender on the next steps.
The purchase process includes appraisals, home inspections, title searches, underwriting, etc. After everything has been approved, you’ll set a closing date. Loan terms and rates can be locked in by the lender. When the date is confirmed, you may want to schedule movers, contact utility companies to change your service, etc.
On closing day, all parties will meet at the title company to sign papers explaining the mortgage, loan and other documents. Talk to your lender about the cash that will be required at closing.
The entire process can take 30-45 days, so it’s best to meet with your lender well in advance to make plans so everything goes smoothly.
Learn more about the steps involved in buying a home →
Ready to get started on purchasing a home?
It’s Never Too Early to Make a Plan
Even if you decide you’re not ready to invest in a home now, you can begin making a plan. Potential homeowners often meet with the Lincoln Lending team up to two years before they think they will be ready to buy so they can work together on a plan.
Many people are surprised to find that home ownership is within reach and is a smart financial decision. There are a variety of loan and down payment options to help first-time home buyers.
We would be happy to schedule a no-cost, no-obligation coaching session to review your specific situation and options available. Our lending experts have years of experience in helping clients consider the pros and cons of buying their first home.
Please call Lincoln Lending (NMLS 398026) at 405) 799-5363 or email us at Info@LincolnOK.com to schedule a time to begin planning for your future.