Hesitant of jumping into the homeownership circle? As with any large purchase, buying a home can be unnerving for someone who has limited knowledge of the homebuying and financing process. As the mortgage world is constantly changing, there are also several misconceptions about what it takes to buy a home.
Here's how to set some of those fears and misconceptions aside when thinking of buying a home.
Buying a house is more expensive than renting.
Today's median rent requires 30.1 percent of a renter's income, compared to a historical average of 25 percent. In comparison, 15.3 percent of income is needed to purchase a median home today, compared to 22 percent historically.
Some fast facts about homebuying versus renting:
- Rental price inflation hit its highest acceleration ratein nearly a decade in 2015.
- Half of renters are currently spending more than 30% of their income on rent; 25% of renters were spending more than 50% of their income on rent in 2013.
- In 2014, homeownership was 38% cheaper than renting across the US.
- Zillow's Rent Forecast is calling for rent bumps to slow in 2016 with a predicted increase of 1.1% for the year, while other institutions aren't so optimistic. RealtyTrac's Rental Affordability Analysis Report predicts that average wage earners will spend 37% of their income on rent for a three-bedroom property in 2016.
I don't make enough money to buy.
Not being able to afford your monthly mortgage payment is a legitimate homebuying fear which is why most lenders recommend that your mortgage payment, including principal, interest, taxes and mortgage insurance (known as PITI), be less than 28 percent of your gross monthly income.
You can compare potential mortgage payments and home price points with our mortgage calculators to see what an affordable home price might look like for you.
I don't have enough money for a down payment.
A 20% down payment is no longer the homebuying status quo. Several loan types include no to low down payment options or down payment/closing cost assistance, such as USDA Rural Development, VA, FHA, HomeReady and 1stHomeIllinois.
For more information and options about how to buy a house without 20% down,click here.
I have too much debt.
While existing debt can limit your purchase price potential, student loan debt, credit card balances and car payments don't necessarily prohibit you from purchasing a home.
Your lender will analyze your debt-to-income ratio, which includes your monthly obligations such as credit card minimum payments, student loans, alimony, child support and car loans along with your PITI. Lenders typically prefer debt-to-income to be at or below 36 percent of your gross monthly income.
My credit score is too low.
However, if your scores are below the minimum requirement, there is still hope for homeownership. There are several ways to improve your credit score, including paying down high balances and checking your credit report for errors.
Depending on a borrower's circumstance, lenders can also perform a rapid rescore. The process is a simulation indicating which actions would help increase your credit score quickly, such as paying off a credit card.
The home I want to buy could have major issues and I'm afraid of maintenance costs.
Home inspections are the way to go if you are fearful of major home issues. A typical home inspection costs anywhere from $300-$500. A home inspector looks for defects or malfunctions in a home's structure, systems and physical components.
Home inspections are often used as contingencies on purchase offers for good reason. If the home inspection of your potential purchase comes back with a negative(s), as a buyer, you have options going forward.
I would feel badly about not getting approved for financing.
A pre-approval should always be the first step in homebuying. And it can help calm the majority of homebuying fears mentioned above.
A pre-approval is a relatively quick process where your mortgage banker compiles a loan application with information you provide regarding income, employment, assets, etc. and runs your credit score. Your lender will analyze this information and issue a decision on your financing eligibility.
For further peace of mind and the ability to act quickly on a home purchase, you can get a loan commitment, which gives you a significant head start against other buyers because you're already approved (pending the home you wish to purchase). In today’s competitive housing market, sound financing is essential. A loan commitment is just as good as a cash offer.
For more information about how to buy and finance your first home, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.