Wednesday, February 11, 2015

Ready For The Switch From Rent To Mortgage?

We've all been there.  You've been renting a place for several years and you're getting kinda tired of the plain white walls, the sounds of your neighbors all around you and scrounging for quarters every week to do your laundry.  Emotionally, you are SO ready to make the jump to home ownership.  But are you ready financially?


The National Association of Realtors claims that 2015 will be "the year of the first-time home buyer".  But does that mean this is your year?  Do your homework and find out.

Are You Here To Stay (For Awhile)?

Before you even consider buying a home, you need to assess your life situation.  Do you love your job and are there advancement opportunities for you here?  Do you like living in your city?  Do you have lots of family in the area and well established friendships?  If you answered yes to all of these and you plan on sticking around for a while (i.e. longer than 5 years), then buying a home in the area is probably a good idea.

But if you're not certain about any one of these questions, then think hard about it.  Just because everyone says that it's a good time to buy a house doesn't mean its good for you.  Closing costs on a home are steep, and if you leave before 5-7 years you are likely to lose money on the deal and owe more on your house than what you bought it for.

Can You Swing It Financially?

Maybe you're very comfortable with your rent and feel like you could stretch a bit to pay for a mortgage.  After all, you'd be gaining equity, right? But even if you up your housing budget by 20% to allow for a home, can you even afford a home in your city at that price and if so, would it be in an area that you'd want to live?  

Peruse house prices in the areas you want to live and using an online mortgage calculator, determine if you can even afford the monthly mortgage amount.

Let's say you get that number and feel like it's in your acceptable range.  Great!  But that doesn't even scratch the surface of what you're going to shell out monthly.  Maintenance of a home comes with costs.  Unlike renting, there is no landlord to call to fix your burst pipe or replace the furnace.  You are the landlord.  Assume an annual amount of 1-3% of the purchase price of your home for a maintenance fund.  So if you buy a $200,000 home, expect to have $2,000 to $6,000 per year in maintenance costs.


But we're not done!  Maybe in order to afford your house, you had to go further out in the suburbs which increases your drive time, which increases the amount of gas you'll use each month and your insurance rates as well.  Or maybe in order to afford your home you had to do some repair and refurbishing of parts (or all) of the home.  Meet Home Depot, your new best (worst) friend.  Or maybe you had to buy in  a less savory part of town and now you need to install a security system or at the very least buy a big dog.  Hello vet bills.

The bottom line is to really think it through and determine if you can afford to own a house on a monthly basis.

How Hearty Is Your Savings Account?


If you found an online mortgage calculator in the step above, then you probably noticed the down payment part of the calculation.  In order to qualify for a conventional mortgage, you need a down payment of at least 5% of the cost of the home up front, with 20% being ideal.  For our $200,000 home we talked about earlier, this means you need between $10,000 and $40,000!

Again, we're not done.  Remember those closing costs we mentioned earlier?  Expect to pay about 2-3% of the purchase price on closing costs.  In our example this means an additional $4,000 to $6,000 at the time of closing.  

In addition, you'll have to come up with escrow fees and still have some amount of money sitting in your bank account so that you won't be house poor.

If you can't swing it, start on an aggressive savings plan so that you can make your dream happen.  Consider it good practice for your higher house payments in the future.

How Healthy Is Your Credit Score?

Your credit score is a measure of how well you have paid off debt in the past and everyone has one.  You can have a bad credit score from missing payments, being consistently late on payments, or even if you have never used any credit ever.  Why does your credit score matter?  Because lenders look at the score and determine if you are a safe person to lend money to of if you are just too risky of an investment.

The highest credit score you can get is 850.  Most lenders consider you a safe bet if your score is above 700.  Lenders start saying "No Way" when your score dips below 640.  If you're in the 500 range, you will only qualify for subprime loans that come with lots of hidden fees and are riskier ways to borrow money.


The good news is that you can always raise your credit score. First, find out your score.  There are lots of free online services out there.  Pay your bills on time and lower your overall debt so that it is less than 30%.  Its better to have a large amount on one card than to have lots of cards with smaller amounts on them.

Are You Pre-approved?

Let's say you've done your homework and find that you are the ideal candidate to buy a new home.  Congratulations!  But don't go looking for a Realtor just yet.  While they will always be kind, you probably won't get the attention you'd like from a Realtor if you do not have a pre-approval letter from a bank in your hand.  This assures them that you have met all the criteria necessary to afford a home and are serious about buying.  


Another advantage to being pre-approved is if you find yourself in a multiple offer situation.  Time is of the essence when you are trying to outbid others for a house.  Sellers are not going to look at any offers from anyone that isn't pre-approved by a bank.  Have this step completed before you even start the process of looking for a home.

If you're ready to speak to a Realtor, we'd love to talk with you about buying your first home.  Please call us at 952-470-2575 or visit our website at

Source:  Michelle Schwake for Stafford Family Realtors

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