With housing prices on the rise, many renters will be asking themselves if it’s time to invest in a home of their own. At NeighborWorks Orange County we believe that homeownership is an incredible investment.
But it’s not right for everyone at this moment. Sometimes it takes time to become homeownership ready. At the end of the day, it all boils down to your specific situation.
If you’re itching to start moving toward homeownership, check out our suggested guidelines to determine if purchasing a home makes sense today.
In order for a home purchase to be a good thing, you have to have some skin in the game. That means saving up for the down payment. Contrary to real estate folklore, you don’t have to put a full 20% when purchasing. While a strong down payment is always encouraged, reaching that high of a percentage in this area of the country is quite challenging.
For most programs or loans, you have to bring a minimum of 3% to the table. Particularly for first time homebuyers, this is much more achievable.
Know that there are several programs designed to help first time homebuyers, such as the Down Payment Assistance Programs. See all the programs here.
The next key factor comes down to affordability. Can you afford the mortgage payments? What types of properties can you afford payments on?
Many renters discover that a mortgage payment will be quite comparable to their current monthly rent. If you work with our counselors, they will actually encourage you to pursue homes that the mortgage is similar to what you currently pay for rent.
Despite what a mortgage broker might qualify you for, increased monthly bills causes payment shock. This could be very damaging for your family. Bottom line, you’re not used to allocating that much to housing each month. It negatively impacts other areas of your budget.
Debt to Income Ratio
Loan providers have specific guidelines in evaluating your debt to income ratio. If a lender sees that your monthly debt payments represent too much of your monthly income, they don’t believe that you are in a good position to pay the loan back.
A typical percentage is to keep your debt to income ratio below 36% for the front end, and below 45% on the back end.
The front end is your monthly debt payments not counting your mortgage divided by your income. For example, if you have $1,000 of debt payments each month and a $5,000 income, your front-end percentage is 20%.
Then they run the calculation with the mortgage payment to create the backend. Add the $1,000 debt payments to a $1,5000 mortgage and then divide it by a $5,000 a month income. You get 50%.
While the front end is in the suggested percentages, the mortgage payment puts your debt to income ratio too high. Before purchasing, our counselors will work with you to pay down your other debts. This puts you in a better position to purchase.
Qualifying for a Mortgage
Prior to hitting the pavement touring the newest listings, we recommend getting pre-qualified for a mortgage. Too often home hunters fall in love with properties far outside what they can get a mortgage for.
That taints the entire home buying process.
Make sure you can qualify for a mortgage and good interest rate early on. In most cases, you will need a credit score above 620. While some individuals with a 580 can qualify, it depends on other factors such as job history at that point.
Working with our lending department not only gives you competitive rates, it’s also part of our unique social enterprise model. They can also help you explore programs and grants you qualify for.
Prepare for Homeownership
For unbiased help determining if buying or renting is better for you and your family, connect with one of our home ownership coaches. They will walk through all aspects of your situation to help you decide.
Regardless of where you are today, at NeighborWorks Orange County we work with families and individuals to achieve sustainable homeownership. From improving credit to paying down debt to applying to the various first time homebuyer programs, we are with you every step of the way.
If you’re not sure if you’re home ready today or want to understand the home buying process, join us at our Homebuyer Classes. This comprehensive class will walk you through the entire home buying process, answer all your questions and ensure you understand which options are best for you and your family.