Often times you hear of home ownership referred to as the American dream but this isn’t always necessarily the case. There are numerous factors to consider when deciding whether to buy your first home or to continue renting. When living expenses consume a considerable portion of most people’s income, it is a good idea to put a lot of thought into the decision and where your money is ultimately going. Here are a few factors to consider before possibly making the leap into home ownership.
1. Low Credit Score
Generally speaking it is said that a score below a 620, will not be helpful to you in buying your first home. If you are below this number, it is probably best to spend the next year or so making a conscious effort to rebuild your score. Delaying the purchase of your first home to do so can end up saving you tens of thousands of dollars in the long term on interest alone.
2. Job Stability or Relocation
Being laid off is usually not something you can anticipate unless your employer is extremely transparent. If you don’t have an emergency fund accumulated in order to make at least the approximate payment of your anticipated mortgage, you probably are not ready to make the leap into home ownership. Most lenders require that you have at least three months of reserves for a reason.
Additionally, even if you have or plan to voluntarily leave your current employer you may have a difficult time securing a mortgage. Lenders like to see a history of employment, if not with the same company, than at least in the same industry. Other factors to consider is how mobile you are. If you are at high risk for being relocated or do not intend to stay in the house for a considerable amount of time, you could very well lose money in the case of a sale. A general rule of thumb is that your property needs to appreciate at least 10% in order to avoid losing money in a sale.
3. Maintenance fund
A home is a continuous project that requires time and money to upkeep. It is always a good idea to have a home inspected before closing on it, but even then, not all of the problems and potential problems are evident. In addition to an emergency fund, it is recommended to have a reserve fund of at least 5% of the purchase price of the home in order to cover maintenance and upkeep. Furthermore, not everyone wants or knows how to maintain a property. Many people prefer to rent in order to have the benefits of a house without the risk of ownership.
In some cities and states it costs significantly more to buy vs. rent in both the short and long term. It is a good idea to not only consider all of the above factors but to also do extensive research on the area you are looking to buy and do a cost comparison between the two for at least five years out.
Tax considerations are also important because of the deductions and depreciation savings that can come with owning your own home. Consulting a CPA may be a good idea if home ownership is on the horizon.
There are obviously many factors that go in to deciding where you live. Although owning a home is something to be proud of there is no fault in waiting to own until you are in a good place to do so. Preparation and planning are two things that cannot be stressed enough when any major financial decision is made and deciding on where you live is no exception.