Often times you hear of home ownership referred to as the American dream, but this isn’t always the case. There are numerous factors to consider when deciding whether to buy your first home or to continue renting – especially when you’re out of college.
Since 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 a credit score below a 620 will not be enough to qualify you in buying your first home. If you are below this number, it is best to spend the next year or so making a conscious effort to rebuild your score. While you may not want to delay the first purchase of your home, you have to realize that a low credit score, even if the bank does approve you, will not allow you to get the best interest rate. In fact, you’ll probably pay over 1% more than the lowest rate, which will cost you hundreds of thousands of dollars over the life of the loan.
2. Job Stability or Relocation
Although there has been a lot of positive news in the job market, it’s still not strong. Being laid off is usually not something you can anticipate unless your employer is extremely transparent. If you don’t have an emergency fund in order to make at least the approximate payment of your anticipated mortgage and expenses, you are not ready to make the leap into home ownership. Most lenders require that you have at least three months of reserves for all your expenses, if not more.
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 are 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.
This is a big problem for recent graduates. You may have to move to secure a good job, so you don’t necessarily want to settle down and buy right away. You never know what could be in store in 2-5 years.
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 that you 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. Just think – when the pipe breaks, you just call your landlord and you don’t have to deal with (or pay for it) yourself.
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.
The Bottom Line
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. Don’t just jump in because interest rates are low or home prices are low. There are a lot of other, more personal, factors that come into play.
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.