3 Signs You're Ready to Stop Renting and Buy a Home
by Maurie Backman | Published on Sept. 8, 2021
Here's how to know if you should take the leap into homeownership.
Going from renting a home to buying one is a big step. Owning a home doesn't just mean swapping a monthly rent payment for a mortgage payment. It also means having to take on other responsibilities, both financial and logistical. These include property taxes, insurance, maintenance, and repairs.
If you're thinking of buying a home, it's important to make sure you're really ready. And if these situations apply to you, the time could be right to stop renting and start putting money into a place of your own.
1. You have funds available for a down payment
When you rent a home, you may have to come up with your first and last month's rent, plus a security deposit at the time you sign your lease. But that total might pale in comparison to the sum you'll need to provide as a down payment on a home you buy.
Most conventional mortgage lenders require a 10% down payment on a home, though some will accept as little as 5%. But if you don't put down 20% of your home's purchase price at closing, you'll be hit with private mortgage insurance (PMI).
PMI is a premium designed to protect your lender, and it can make your housing payments more expensive. If you have enough money for a 20% down payment on a home, you'll probably feel confident moving forward with a purchase. You may also feel comfortable if you can put down 10%. But if you're struggling to come up with 10% on a home, you may want to keep renting and work on socking away more money.
2. Your credit score is in great shape
You'll need a minimum credit score of 620 to qualify for a conventional mortgage. But if your score isn't in the low 700s or higher, you may want to continue renting and work on boosting your score before buying.
The higher your credit score, the lower the interest rate on your mortgage is likely to be. Generally, you'll qualify for the best rates once your credit score reaches the mid-700s or higher, and you'll usually be eligible for a decent rate with a score in the low 700s. But if your score is hovering in the 600s, you may want to take steps to raise it before buying a place of your own. That's not a process that happens overnight, though, so renting for another six months, for example, could be a good bet when your score needs work.
3. You don't have much in the way of debt
Taking on a mortgage is a huge responsibility, so it's a good idea to go into that process with as little debt as possible. If you currently have a small auto loan, for example, but nothing more, then you're probably in a pretty good position to buy a home. But if you still have a couple of nagging credit card balances, a car loan, and a separate personal loan hanging over your head, you may want to keep renting and chip away at those debts.
Not only does entering homeownership with a lot of debt put you at risk of falling behind on your bills, but you'll have a harder time qualifying for a mortgage in the first place if your debt-to-income ratio is too high. That ratio measures your monthly debt obligations relative to your income, and lowering it will make you a more attractive loan candidate.
Some people don't mind renting. And there are definite perks to having a landlord be the one responsible for things like maintenance and repairs. But owning a home could be your ticket to more financial stability. If you're interested in buying one and you have the funds for a down payment, plus great credit and minimal debt, then it could pay to start house-hunting and see what's out there.
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