It’s that time again. Your housing rental agreement is about to expire. Renewing your lease is a simple process. But with a pending rent increase and noisy neighbors, you’re wondering if buying a home is a better choice.
With home loan interest rates at record lows, you might be able to say goodbye to rent increases and enjoy greater privacy. Homeownership also allows you to invest in an asset expected to increase in value, offers tax advantages, and can provide more living space.
But unless you’re financially ready to purchase and maintain a home, renting could be the better option. Ask yourself a few key questions before you start scanning real estate listings.
How’s my credit?
Many homebuyers let recommended mortgage down payment amounts determine if they’re ready to buy a house. It’s understandable. The more money you put down, the less you’ll need to borrow. But, an equally important consideration is your credit health. Good credit scores may qualify you for loan programs with lower (or zero) down payment requirements.
Request a free copy of your credit report from AnnualCreditReport.com. Each report summarizes the credit behaviors negatively affecting your credit health. Review them for accuracy and dispute any errors.
A recent history of late payments and heavy credit usage might mean you’ve taken on too much debt. This may limit your loan options. Improve your credit health by paying bills on time and reducing credit account balances.
Am I financially ready for home maintenance and repair costs?
A mortgage loan payment is only one of several expenses associated with homeownership. Taxes, insurance, routine maintenance, and unexpected repairs are examples of the added costs to factor into your budget. While taxes and insurance can be rolled into your mortgage payment, setting aside funds in a high-interest rate savings account is a smart way to prepare for maintenance and repair costs.
A HomeAdvisor® study found that in 2018, U.S. households spent an average of $1,105 on maintenance and $416 on emergency costs for their homes. Building your savings fund takes time. The earlier you start, the less chance a plumbing repair or other unexpected expense has of derailing your budget.
Is debt putting the squeeze on my finances?
Too much debt can prevent you from qualifying for a home loan, even if you have good credit. Lenders calculate a debt-to-income (DTI) ratio by comparing your debt load to your income. If the lender determines that your DTI is too high, the loan could be denied. Exact calculations and lender requirements vary, but mortgage loan applicants with DTIs that exceed 45% are less likely to be approved for a home loan.
Example DTI calculation
- Total monthly debt payments = $5,000
- Total monthly gross (before taxes) income = $6,667 ($80,000 annually)
- DTI = 75%
High DTIs leave little room to pay for the costs of homeownership.
Reduce debt before you apply for a mortgage. Doing so can improve your credit score and lower your DTI, which may qualify you for a home loan with the lowest interest rate and favorable terms. If you have a high DTI and minimum debt payments are all you can afford, delaying homeownership until your situation improves might be the better choice.
Visit our Financial Wellness Center to learn more about buying a home. You can examine how your lifestyle, financial situation, and goals help determine if you’re financially ready to buy a home or if it’s best to continue renting.