Owning a home is a major part of the American Dream for many people. It takes a lot of hard work and savings to accomplish, but when you’re given the keys to your very first place, it’s a feeling that is often unmatched.
Owning a home is a big responsibility. There is a lot more that goes into owning a home than renting a place to live. In addition to the added financial costs, there are also other responsibilities to think about. Repairs and ongoing home maintenance can be costly and time-consuming.
There are also other things to consider, such as the type of mortgage you will qualify for and the current state of the local housing market.
As you are thinking about buying a house, here are some things you should consider.
Can You Afford a Down Payment?
When you rent the place where you live, you likely were required to pay upfront costs such as a security deposit to start your lease. There are similar upfront costs to buying a house, but they are much more significant.
A down payment is something that every mortgage lender will require, although the amount of that down payment will vary depending on the type of loan you take.
It is always advisable to put down at least 20% of the price of your home so that you don’t have to pay monthly PMI or private mortgage insurance. That fee is tacked onto your monthly payments, and can quickly add up to as much as $70 for every $100,000 you borrow.
That 20% down payment equates to $40,000 on a $200,000 home. It’s quite a substantial amount of money. Even if you take an FHA loan that allows for a down payment as low as 3.5%, you’d still be required to make a down payment of $7,000.
Keep in mind this doesn’t include any closing costs that you’ll need to pay for inspections, an appraisal, and other items.
What’s Your Debt-to-Income Ratio?
One of the main things a lender will look at when they’re considering your mortgage application is what your debt-to-income ratio is. It’s a simple calculation that you can do to show how much you owe in debt versus how much you bring in from all your sources of income.
Lenders use this DTI ratio to determine whether they think you’ll be able to meet your monthly mortgage payment. The standard that the Federal Housing Administration uses as a guideline to approve mortgages is 43%.
Included in this ratio will be all of your current monthly debt payments — such as credit cards, student loans, and car loans — in addition to any costs that will be housing-related — such as mortgage and PMI, property tax, and homeowners insurance.
When you add all that up, it shouldn’t exceed 43% of what your monthly gross income is. If your monthly gross income is $5,000, for example, you can multiply it by 0.43 to see your optimal DTI of $2,150. This means that your total monthly debt obligations, including all your housing costs, shouldn’t exceed $2,150.
What’s the Housing Market Like?
The amount of home you can afford to buy isn’t just determined by your financial situation. It’s affected in a large way by the current state of your local housing market.
In a seller’s market, you’ll likely get a lot less for your money than you would in a buyer’s market. When inventory is low or there is a significant demand for homes — as has been seen over the last year — then prices can skyrocket quickly. When the reverse is true, prices drop and homes become more affordable.
After you’ve figured out how much home you can afford, it’s a good idea to take a look at the homes that are available in your market in that price range. Once you see what your money can buy you, you can determine whether now is a good time to jump in, or whether it would be better to wait out the market — if you have that luxury.
What’s Your Lifestyle Like?
There are other non-financial factors that you should consider as well. Do you have the time, energy, and interest in performing ongoing maintenance and repairs at your home, or do you at least have the money to pay someone else to do them?
If you don’t, it may be best to continue renting, as these things won’t be your responsibility. Being a homeowner brings a lot of responsibilities that being a renter doesn’t. Don’t lose sight of that when you’re trying to figure out if buying a house is for you.
In addition, you should consider other lifestyle factors.
How far are the homes you can afford from your work, your family and friends, and the things you like to do? Are you willing to compromise a longer daily commute for a bigger home with more property? Would you have to compromise other parts of your lifestyle, such as eating out less and cooking at home more?
You should consider these factors as well when you’re determining whether buying a house is for you.
When You Buy a Home, We’re Here to Help
Buying a home is a long-term commitment and one that you should be prepared for before you sign on the dotted line. Being a homeowner involves a significant financial commitment that being a renter does not. There are also a lot of lifestyle changes that typically need to happen when you make the transition from renting to owning.
When you decide that buying a house is for you, you can rest assured that you’ll have the help of trusted insurance agents at Signature Insurance. We have been covering homeowners just like you in Michigan for years, providing them with customizable products and know-how that make protecting your biggest personal asset a breeze.
Contact us today to find out more and to get a free homeowners insurance quote.
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Contact us at (586) 274-9600 and we’ll be happy to get quote for you from many of the top auto insurance companies or home insurance companies in Metro Detroit.