There comes a time in many young adults’ lives when they begin to think about owning a home. Home ownership is, after all, the American Dream, but it’s not the right choice for everyone at a prescribed time.
Employment History, Ample Savings and Good Credit
Mortgage lenders expect to see stability in your employment history, so they’ll look more favorably on buyers who have been employed in the same field for at least two years. Lenders also want buyers to have two-three months of mortgage payments saved in reserve. Consider this a small emergency fund, but lenders want to know that you haven’t taken absolutely everything you have and put it into the home purchase. You’ll need to make sure your credit history is as clean as possible, as you will most likely need to get a mortgage to enable you to buy a piece of property. You’ll need to review your current credit score, and the higher your score the better chance you’ll have to be approved for the mortgage loan. If there’s anything on your credit report that’s not entirely favorable, try to resolve it if possible.
Roots Not Wings
For those just starting out in life, buying a home may be premature until you’re settled on life decisions including career choices, the city you’d like to reside in and whether you’d like to marry and start a family. If those choices are settled, home ownership might be a good option for you, as you can start to build up equity instead of just paying rent. Owning a home requires hard work. There’s a lawn to mow, windows to wash and other repairs from time to time. Are you going to have the financial resources, time and desire to put in the effort ownership requires? Also, if you don’t plan to remain in one place for at least a few years, home ownership may not be the right choice for you right now. With the costs of buying and selling a home, if you’re forced to sell sooner than a few years’ time, you may end up losing substantial money.
Review Your Financial Condition
The rule of thumb is that you can buy housing that runs about two and a half times your annual salary. But beyond that, you’ll want to understand if you undertake this major purchase if you’ll be able to afford anything else outside your home. Lenders use a debt-to-income ratio, which is the percentage of your monthly income that goes to existing debts, to see if you’ll be able to handle your current monthly debt obligations, your new mortgage and home ownership costs, and still have some cash left over every month. If you’re trying to buy a condo, you’ll also need to factor in the possibility of special assessments into your budgetary considerations. To determine how much house you can afford to buy, another common rule of thumb is the 28/36 rule. Your monthly housing payments, including your mortgage, insurance and property taxes, should not exceed 28 percent of your gross monthly income. Your total debt should not exceed 26 percent of your gross monthly income. Also, you’ll need to ask yourself the following questions to determine if you can financially swing home ownership:
- Do I have a reliable source of income?
- Do I handle my finances responsibly?
- Do I have a written budget?
- Do I have money for closing costs, a down payment and moving costs?
- Do I understand the additional costs associated with home ownership, such as insurance, maintenance and larger utility bills?
If you understand both the financial and emotional ramifications of home ownership, and think your current lifestyle and future goals fits into those parameters, then happy home hunting!