Buying a home is the largest purchase most people will ever make. Homeownership has great benefits. Homeownership also comes with certain responsibilities.Are you ready for homeownership? Look at your current situation and determine if:
- You have a continuing and reliable source of income prior to applying for the loan.
- You have a credit history that shows you're ready for homeownership.
- Your total debt is manageable and you can afford to take on the costs associated with homeownership.
- You have money saved or a down payment and closing costs.
- Once you fully understand your current situation, it's important to look at the pros and cons of homeownership to make the best decision for you and your family.
Credit and Homeownership
If you're thinking about buying a home, you should also be thinking about your credit. The first step in the homebuying process is understanding your credit.
When you apply for a mortgage, lenders will review your credit report. Your credit report is a history of how you've managed your finances: it's a record of money you've borrowed and your history of paying it back.
Your credit report is a record of all your credit transactions whenever and wherever you've used credit to purchase goods and services. Your credit will have a big influence on whether or not you can get a mortgage, the terms of that loan, and the interest rate. If you have good credit, you may have a much wider range of mortgage offers with lower rates.
So how do you better understand credit?
- Be aware of how important your credit history is to the process.
- Establish good credit and protect your credit.
- Look at your credit report and credit scores.
- Make sure you correct any mistakes on your credit report right away.
What Are the Risks?
Overall, homeownership is a good investment for most people, but there are risks. If you understand the benefits and risks of homeownership, you can make the best decision about when to buy a home.
So what are the risks of homeownership?
Monthly housing expenses can increase.Your monthly mortgage payment may be larger than your rent. These higher monthly payments may be offset by a tax benefit at the end of the year. Talk to a tax professional to understand your particular situation.
You become your own landlord.If an appliance breaks, you will have to pay for its repair or replacement. You are also responsible for the maintenance and upkeep of your home and your property.
You must sell your house to move.Depending on the local real estate market, you might not be able to sell your home quickly. You should also factor in the likely expense of hiring a real estate professional. Fees can be negotiated and vary across regions. They also vary from professional to professional.
Property values can depreciate.You can lose value in your home for a number of reasons, such as a recession, the condition of your home not being kept up, or a drop in a neighborhood's home values. If your home loses value and you have to sell it for less than you owe, you will be required to repay the full mortgage.
Down Payments and Closing Costs
When you buy a home, there are several up-front costs you should be aware of, particularly down payments and closing costs.
Down Payments
A down payment is usually between 3% and 20% of the total cost of the home. The amount of the down payment depends on your credit history, income, the cost of the home, and the type of mortgage you choose. Some lenders also have loan options that allow for no down payment at all.If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay to protect the bank if you don't repay your loan in full. PMI is added to your closing and monthly mortgage costs. When you apply for a home loan, many mortgages require you to also have at least two month's worth of mortgage payments saved, called reserves. However, there are mortgages that do not require reserves.Most lenders want to know the source of your down payment and have restrictions about how much can come from gifts from your relatives. In most cases, these gifts will need to be documented. Ask your lender for more information.
Closing Costs
Closing, or settlement, costs are fees you pay when you actually get your loan from your financial institution. These include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other settlement costs.Closing costs generally range between 1.5-7% of the loan value. You'll receive an estimate from your lender after you apply for a mortgage. You must pay these costs at the time you close on your loan.
