Steps To Take Before Transitioning From Renter To Homeowner
So you've made the decision to stop renting and start building wealth by becoming a homeowner. Congratulations!
But before you celebrate, you have some work ahead to be as prepared as possible and make a smooth transition from renter to homeowner. Here are some steps to take to make sure you're 100% ready for the responsibilities that come with putting renter life behind you and purchasing your first home.
Improve and protect your credit.
Taking stock of your credit status is an important step when thinking about becoming a homeowner. Be sure to check your credit score, and pay down as much debt as possible. Avoid applying for new lines of credit because that can lower your credit score. Make sure every payment going forward is made on time.
Lastly, consider consulting with a financial advisor to make sure your credit is in the best shape possible before applying for a mortgage loan. Read this article for more details on how to improve and protect your credit.
Strategize for your down payment.
A down payment might seem like an intimidating amount of money to come up with, but there are many strategies for saving for a down payment. You can also apply for down payment assistance, borrow from family, in some cases it might even make sense to leverage your 401k.
Be aware of all the associated costs.
The down payment will likely be the largest expense associated with buying a home, but there are other costs to know about as well. These include earnest money, closing costs, moving costs, and possibly others.
Also keep in mind that once you own your home, in addition to mortgage payments you'll be responsible for insurance payments, possible homeowners association fees, utilities, and potential upgrades and repairs. Read more here about costs to expect when buying your first home.
How much can you afford?
One of the last steps before you start shopping for homes is to figure out how much you can afford. Consider your current income, debt, down payment amount, mortgage interest rate, and loan term, and plug it all into an affordability calculator.
It's also a good idea to follow the 28/36 rule, meaning you should plan to spend no more than 28 percent of your gross monthly income on housing expenses, and no more than 36 percent on total debt. For example, if you earn $4,000 each month, your mortgage payment should be no more than $1,120 (28 percent of $4,000), and your other debts should add up to no more than $1,440 each month (36 percent of $4,000).
This article will give you even more detail on how to determine a price range that will allow you to comfortably keep up with your mortgage payments within your current salary and expenses. Once you have all your ducks in a row, you can start the fun part: searching for homes, touring them, and making offers.
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