Are you ready to make the leap from renter to homeowner? First, you want to be sure you’re prepared to take stock of your financial situation and determine if you’re ready for the responsibility.
For many, the top concern is affordability—including having enough cash saved up to fund a down payment and a credit score good enough to qualify for a home loan. But there also are other considerations, along with plenty of myths that could keep you from taking that first step. Here, some potential roadblocks to homeownership, and why they really aren’t as daunting as they might seem.
1. Buying a home means heavy debt
While some folks might argue that continuing to rent can spare you from taking on heavy debt, there are lots of advantages to owning a house. For instance, purchasing a home with a typical loan would spread out your payments over 20 to 30 years.
If you can make an extra payment a year or bi-monthly payments instead, you can shed up to seven years from that long-term loan. As you pay your mortgage, you also gain equity in the home and create an asset that can be used when needed, such as paying off debt or even buying a second home. With mortgage rates at their lowest point in history, it’s a great time to borrow money.
2. At least a 20 percent down payment is needed to buy a home
Contrary to popular belief, a 20 percent down payment is not required to purchase a home. Several low down payment options are available for all types of buyers, from 0 percent down for Veterans Affairs loans to 5 percent for conventional loans.
One of the main reasons buyers assume they have to come up with a 20 percent down payment? Without it, buyers typically have to pay private mortgage insurance (PMI) that adds to the monthly loan amount. The good news: Once you’ve reached 20 percent equity in your home, the PMI is eliminated. This is usually accomplished by refinancing your loan, which ultimately lowers your original payment that included PMI.
3. Your credit score needs to be perfect
Mortgage lenders typically like to see that you have a credit score at or above 660. Although your credit score and history play a significant role when it comes to obtaining a home loan, that doesn’t mean a buyer needs super-clean credit. There are numerous loan solutions for buyers who have a lower than the ideal credit score, including government-backed loans insured by the Federal Housing Administration that have lower credit and income requirements than most conventional loans.
FHA loans also require a lower down payment, with lenders often willing to work with home buyers to improve their credit so they can obtain a loan most suitable for their needs and financial situation. Buyers who are building their credit also can use a home loan to bolster their scores and create a foundation for future borrowing and creditworthiness.
4. Now is a bad time to buy
Buying a home during a buyer’s market or when interest rates are low is a smart money move. But don’t let the fear of buying at a less-than-optimal time keep you from moving forward. If you feel like you’ve found a good deal, there is truly no bad time to buy a home. No one can predict exactly where the market will be at a given time. If you stay within your means and have a financial contingency plan in place if the market adjusts over time, it is the right time to buy.
5. You’ll be stuck and can’t relocate
Some people may be hesitant to buy because it means staying put in the same location. The rule of thumb? You should plan to stay in a newly purchased home for a minimum of three years. That means you can ride any market swings that might occur, and you also will have time to develop a sense of connection to your new space. In a healthy market, homeowners likely will be able to sell the home in a year or two if they need to move, or they can consider renting out the property.