Why Own A Home?
There are many great reasons to own a home:
- You’ll have a place that is yours!
You’ll own it, have a place to raise your children and become a part of your community. You can pass your home down to your children, and their children, creating security for generations to come. - You may pay less to own a home than you would to rent – and it’s yours at the end!
Homeownership can reduce the federal income taxes you pay. You can deduct the interest on your mortgage and property taxes you pay on your home on the tax returns you file each year. These tax savings partially reduce, or offset somewhat, the actual cost of owning your home. - Your monthly payments won’t ever go up if you choose a fixed-rate mortgage!
If you choose a mortgage with a fixed-interest rate (one that stays the same for the life of the loan, say 30 years), you'll pay the same mortgage payment each month for the entire 30 years of the loan. - You build a good nest egg!
Owning a home is the single greatest source of financial security and independence for the majority of people who’ve taken this step. You can have it, too!
How Much Can You Afford?
To get a quick idea of what you can afford to spend, multiply your annual gross income (before taxes) by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is just a rough estimate - the actual number will vary based on factors such as your debt and credit history.
Mortgage lenders typically use the housing expense and debt-to-income ratios to more accurately determine how much you can afford to spend on your mortgage.
- Housing Expense Ratio
Mortgage lenders recommend that your monthly mortgage payment should be less than or equal to a quarter of your monthly gross income. This percentage can change based on the type of mortgage you choose and sometimes the area in which you're looking to buy. - Debt-to-Income Ratio
You need to factor your other debts into determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 30-40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses.
A Neighborhood Housing Services of Greater Cleveland HUD-certified housing counselor can help you better understand these guidelines. Before you talk to a financial professional, you can organize your financial picture by creating a budget. Don't forget that you also have to save for the down payment, closing costs, inspections costs, moving, and other related expenses.
What Are the Risks?
Overall, homeownership is a good investment for most people, but there are risks. If you understand the benefits and risks of homeownership, you can make the best decision about when to buy a home.
So what are the risks of homeownership?
- Monthly housing expenses can increase.
Your monthly mortgage payment may be larger than your rent. These higher monthly payments may be offset by a tax benefit at the end of the year. Talk to a tax professional to understand your particular situation. - You become your own landlord.
If an appliance breaks, you will have to pay for its repair or replacement. You are also responsible for the maintenance and upkeep of your home and your property. - You must sell your house to move.
Depending on the local real estate market, you might not be able to sell your home quickly. You should also factor in the likely expense of hiring a real estate professional. Fees can be negotiated and vary across regions. They also vary from professional to professional. - Property values can depreciate.
You can lose value in your home for a number of reasons, such as a recession, the condition of your home not being kept up, or a drop in a neighborhood's home values. If your home loses value and you have to sell it for less than you owe, you will be required to repay the full mortgage.
Myths About Homeownership
Lenders evaluate mortgage applications a lot differently today than they did even 10 years ago. And even more has changed in the last 20 years. What used to close the door to homeownership may not be a factor today.
Here are some common homeownership myths:
- Myth: You need great credit to become a homeowner.
Fact: You may still be able to buy a home with less-than-perfect credit. And remember, you can improve your credit over time. - Myth: You need to put 20% down to buy a home.
Fact: There are many types of mortgage products and programs that allow low and no down payment. But remember to factor in other costs such as closing costs, property taxes, moving expenses, and repairs. - Myth: You can't buy a home in the U.S. if you're not a citizen.
Fact: If you're a legal resident, you can purchase a home in the U.S. - Myth: If you don't have a bank account or credit cards, you can't qualify for a mortgage.
Fact: Having a bank account is always a good idea and helps you establish credit. However, lenders can approve you for a mortgage even if you don't have a bank account or credit cards. You'll likely need to keep records showing a history of payments you've made for items such as rent, utilities, and car payments. - Myth: Lenders share your personal financial information with other companies.
Fact: By law, banks and other financial institutions are restricted in their uses and disclosures of information about you. In some situations, you may choose to restrict the disclosure of your information if you don't want it to be shared. - Myth: If you're late on your monthly mortgage payments, you'll lose your house.
Fact: If you have a financial hardship, like the death of your spouse or a medical emergency and fall behind, it's possible to keep your home and get back on track if you contact your lender early. - Myth: You can't get a mortgage if you've changed jobs several times in the last few years.
Fact: Not true. You can change jobs several times and still get a loan to buy a home. Lenders understand that people change jobs. The important thing is to show that you've had a stable income.
