You’ve reached a point in your life when you are thinking about buying your first home. At what point does it make sense to own a home instead of renting? 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 here are six of the most common concerns we hear about making a home-buying decision.
1. I can’t afford a down payment.
The required minimum down payment varies but is usually 0% to 5% of the home’s purchase price. There are several programs offering down payment assistance for first-time homebuyers. Most will assist with up to 3.5% in down payment assistance. Some may be city or county-specific and often require a much higher interest rate in order to offset the down payment money.
Beyond the down payment, you should also plan for “closing costs” and “prepaids.” These are typically out-of-pocket expenses that will be required when you close on your new home.
- Closing costs are the actual costs of getting a house and home loan (lender fees, title fees, county tax, state tax, appraisal, survey, home inspection, pest inspection, etc.).
- Prepaids are items like property taxes and home insurance that are separate from your home loan and are paid in advance.
Closing costs and prepaids can vary greatly depending on the cost of home & property tax rates, but for most average-priced homes in Oklahoma the total will be somewhere between $5,000 to $7,000.
There are ways to reduce these costs. For example, buyers can ask the seller to pay closing costs. If the seller agrees, then the borrower will not have to use cash for these expenses. If you qualify for a 0% down payment and the seller agrees to pay nearly all of the closing costs, you may be able to buy a house with only a few hundred dollars in out-of-pocket expenses.
Interested in what it takes to plan ahead on purchasing your first house?
2. I don’t know if I can 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.
You may actually be paying more in rent than you would pay for a mortgage payment for same size house. For example, a person I know rents a three-bed, one-bath house for $1,100 per month. If she bought the home for its current value of around $105,000, her overall monthly payment would only be about $860.
It’s also important to consider the value of building equity in your home. When you make your mortgage payment, some of the payment goes to the principal balance of the house. Equity is the difference between how much you owe vs. how much your house is worth.
Houses tend to increase in value over time, and you build equity with each mortgage payment. Over time, it is like you have a savings account built into your home. You can tap into it when you sell your home and use the equity for down payment on a new home, or maybe get a Home Equity loan and use the money for updates or to pay off other debt.
3. I don’t think my credit score is good enough.
Almost all loan programs have minimum credit scores. Buyers should be prepared to have at least a 580 score for government programs and a 620 score for 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.
There are several ways to find out your credit score:
- You can go to each credit bureau -- Experian, TransUnion, and Equifax -- but they may charge a fee.
- There are also websites that offer free credit reports and free scores. One of the most popular is www.annualcreditreport.us, but they only give you a report and not scores.
- To get scores, there are several websites like www.credit.com.
All of these sites should only be used as a general gauge of your credit strength. The mortgage industry uses a different formula to calculate credit scores than other industries like car dealers or credit card companies. The score you had when you bought a car may be different from the score you get when applying for a home loan.
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 homeownership. While this is different for every person, it usually helps to pay down credit card balances, keep balances low, and make payments on time. If you have credit cards with zero balances, consider keeping them open with a zero balance instead of closing the account. It can actually help your credit.
4. I’m not sure I’ve been at my job long enough.
Lenders will usually need documents like a paystub to show you’ve been at a job at least 30 days. But they will also want to know what you have been doing for the previous two years, which is why they will ask for W-2s and tax returns. Did you have a different job or are you a recent high school or college graduate? Were you unemployed? Bonuses and overtime won’t be considered part of your income unless you have a two-year history of receiving that income with the same company.
If you are self-employed or file a 1099, two years of income records will be necessary.
A lender looks at your job stability to be sure the mortgage payments will be manageable; however, changing jobs isn’t a deal-breaker. If you have changed jobs for higher pay or better opportunities in your industry, that is an acceptable reason for a switch.
5. I just don’t know if I’m ready to settle down.
Beyond the financial planning, it’s important to think about your personal lifestyle choices before buying a home.
- Maintenance – When you rent a home, there are no maintenance costs. But when you buy a home you’ll be responsible for repairs and maintenance. It’s a good idea to plan an emergency fund for urgent repairs, like replacing a broken water heater. A general rule of thumb is to save 1% of the cost of your home per year (i.e., $200,000 home = $2,000 per year in maintenance.) You will also need to be prepared to purchase maintenance items like a lawnmower, garden hoses, etc., that you may not have needed in an apartment or rental home.
- Appliances and Furnishings – Plan for the cost of major appliances, window coverings, furniture, and other purchases that will be needed for your new home.
- Lifestyle – Some people may love the apartment complex pool, while others would rather have their own washer and dryer to avoid the apartment laundromat. Or maybe the apartment was great as a couple, but now you have kids or pets that need an enclosed yard. What is important to you?
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. Buying a house knowing you’ll be moving in a year or two is generally not a good idea. Selling a home means closing costs and realtor commissions will reduce your equity. A good rule of thumb is planning to stay in your home at least three years. Of course, if the real estate market is booming and houses are appreciating at a fast rate, selling might be okay after a year or two.
6. I don’t know if this is the best time to buy.
Don’t rush into this decision. You don’t want to overspend on a house or make a poor decision because you feel like you have to do something immediately. Real estate tends to increase in value fairly steadily unless there are extreme circumstances like the market crash in 2008. It is time to buy when you are stable enough and ready to do so.
Plan ahead and have a contingency plan if you don’t find a home before your lease is up. Check on being able to go month to month or make a plan to stay with family and friends.
Also consider the time of year for a move. People with children tend to move in the summer to avoid interrupting the school year. Winter is often considered a “slower” season and you may be able to save a little on the purchase price or moving costs.
Are You Ready to Buy?
Buying your first home is a big decision. It’s vital to think about what is really important to you. What are your plans for the next few years? Is your job situation stable? What is best for your kids? Does buying a small “starter” home now help you build the equity to make your future dream home a reality? With careful planning and assessment, you can make your decision with confidence.
We would be happy to schedule a no-cost, no-obligation meeting 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.
To schedule a meeting, please call Lincoln Lending (NMLS 398026) at (405) 799-5363 or email us at Info@LincolnOK.com.