”A journey of a thousand miles starts with a single step.- Lao Tzu
According to The National Association of Realtors, 5-year home price appreciation outpaces wage growth in 97% of 182 metro areas. Affordability challenges cause buyers to think homeownership is impossible.
Are you discouraged by the constant stream of news about how hard it is to buy in the current market? Do you feel overwhelmed by the complex process of buying a home? And yet, despite those obstacles, do you still aspire to be a homeowner? We applaud and support you!
While buying a home is more expensive than it was a year or two ago, it will never be as costly as renting over time. Even with mortgage rates hovering at 8%, this does not come close to the 100% you pay in interest renting every month. And then there’s the potential home equity you lose every month renting as well.
Regardless of what’s happening in the market, we believe that homeownership is one of the most satisfying investments a person can make. Beyond the long-term financial benefits like appreciation, amortization, and tax deductions, there are also the intrinsic benefits of being able to customize your home to express your style and an enhanced sense of community,
So, clarify what is motivating you and keep your eye on that prize. Would you like to be closer to loved ones? Do you want the freedom to landscape your yard without a landlord’s oversight? Perhaps homeownership is about achieving financial goals or setting your children up for success. Whatever your motivation is, establish it up front and hold it close as you move forward in the process.
Assess Your Situation
Once you’ve clarified your motivation, the next step is to evaluate your personal and financial situations to determine the best timing for you. Where do you see yourself in two to five years? Are you ready to stay in one location or do you anticipate moving a few more times? In general, it takes about five years to build equity and account for costs associated with selling and buying. The longer you own your asset the greater the financial gain tends to be.
Familiarize yourself with the criteria a lender will use to determine your creditworthiness and your ability to obtain mortgage financing. Three main considerations are: your income, your credit score, and your down payment.
According to current guidelines, you need a gross annual salary of $80,000 to qualify for a $300,000 mortgage. A conventional loan requires a front-end housing expense of less than 35%. (PITI+Insurance+Taxes+Mortgage Insurance/Monthly Gross Income). FHA and VA loans may go higher.
Find out what your credit score is and whether it needs some work. You’ll typically need a score of 620 or higher to qualify, but some government loans will go down to 540. Conventional lenders are looking for 45% or less of your gross income going towards debt, including your housing expenses. VA loans do not have caps and FHA loans may go up to 55%.
You’ll also want to consider how much debt you have compared to your income. Lenders call this debt-to-income ratio and use it to gauge the monthly payment you can afford. The backend debt to income component of lending adds your monthly housing expense with your debt obligations. Typically lenders like to see a debt ratio less than 45% for conventional loans and can go up to 55% on FHA loans with VA loans not having a backend cap.
There are several financing options for down payments, including down payments as low as 3%. Income-based grants are available and VA loans don’t require any down payment. Set up a meeting with a loan officer to help formulate the best plan for you.
Choose a Competent Team and Create a Roadmap
Now that you’ve established your motivation and considered your personal situation, it’s time to find a competent team to set your plan in motion. Some buyers may qualify to buy right away. Others may have some work to do–like credit repair or debt paydown–and need to create a roadmap to accomplish these steps. No matter where you are in your journey to homeownership, it’s important not to compare your situation to others. Focus on the goal of homeownership and the steps you set to achieve it.
Luckily, your Realtor and Lender are adept in homeownership roadmap planning. We are thankful to be involved in every part of the process, from the time our clients have their first inkling of buying a house to actually buying it and then, ultimately, seeing how it benefits them in the long run.
As a native Salt Laker, Sara Young understands the nuances of neighborhoods throughout the city and surrounding counties. She prides herself on her ability to explain the real estate process and sharing timely information to guide her clients’ decisions. You can count on her to handle every detail as she works with you to have a smooth transaction and achieve your goals.