Buying your very first home and preparing for you home loan is one of the most important things that you will probably do in your life. You may have rented before but now are deciding whether to buy vs. rent a place to live. Here are tips to help you decide.
Preparing For Your Home Loan
Before you have picked out the house you would like to buy, you should know how to prepare for your home loan. The financing for most home loans is done by a mortgage lender. They will usually first want to find out exactly how much of a mortgage payment can you afford.
While buying your first home, lenders will use guidelines called debt to income ratios, or two percentages of your monthly gross income (income before taxes), that you use to pay for monthly costs. Two typical debt to income ratios are 33 and 38. The first ratio 33 means that no more than 33 percent of your monthly income should go to paying the monthly principal, interest, taxes, insurance and any homeowners association dues.
The second ratio, 38, says that only a maximum of 38 percent of your gross monthly income should pay for the same monthly housing costs and consumer type debts, such as installment loans, car payments, credit cards, and other similar expenses.
It is important to know that while preparing for your home loan, lenders will want to see stable employment or income for at least 2 years. Provide a human resource contact at work that will verify your employment start date, current pay, and good standing.
Buy vs. Rent
Buying gives you ownership. You can sell and get every back dollar that you paid for the home, often making a nice profit. Also, as you pay down the home loan over the years, you increase the equity or the difference between the home’s market value and what you owe. This difference can be used for getting a home equity loan, for an emergency, college, or remodeling. But, when your faucet breaks you have to either fix it yourself or pay for a repairman.
Buying your first home is a long commitment. You should plan ahead by asking yourself, what your goals are after purchasing the home. Is building up equity or having more cash available more important?
Not ready to buy? Ask yourself How Much Should I Save For A Down Payment? Saving a higher down payment greatly reduces your monthly mortgage payment for your home loan. Also, ask a tax adviser for homeowner deductions such as mortgage interest as well.
Renting is easier to qualify for because usually only a credit and residency check is required. Beyond the monthly rent, the rental contract also makes you responsible for any damage. But, the owner often provides repairs on plumbing and major appliances.
Renting can save a lot of money, when it costs less than a typical mortgage payment. This makes saving for college, retirement, traveling in the future or investments possible. Also, unlike owning a home, you can easily relocate to pursue job opportunities.
