Finurah will be bringing you a series of articles discussing the difficult choices associated with purchasing a home. Homeownership is one of the main ways to build generational wealth and to help close the racial wealth gap. But it takes more than a mortgage to buy a home, and Finurah will help you prepare for future homeownership.
Buying a home is a big step, and it’s more than the “American Dream.” Homeownership is one of the greatest assets Americans can achieve. The equity earned from homeownership can increase a homeowner’s wealth over time–providing greater opportunity to pass on generational wealth. And for Black homebuyers, it can lead to a path of closing the wealth gap.
“Homeownership allows a buyer to build equity and enables a buyer to hedge against rising rental rates,” Khari Washington, a mortgage broker with 1st United Realty and Mortgage, told Finurah. “Financially stable homebuyers can ride out the ups and downs, so a buyer that focuses more on their finances and less on the market can do well over the long term.”
Recent data released by the U.S. Census Bureau found that the African-American homeownership rate was 44.1 percent–at least 30 percent lower than other Americans. Yet, the foreclosure rate for African-Americans was also the highest–21.6 percent, according to the Center for Responsible Lending. This data reveals the results of reckless lending practices during the home mortgage crisis between 2007 and 2009 when subprime lenders ranked in huge profits issuing mortgages to people who couldn’t afford them.
Clearly, buying a home is within reach. But how do you know when it is the right time for you to become a homeowner?
Finurah spoke with several experts in the homebuying industry to provide readers with insight on home-buying readiness. Here are five signs that a person is truly ready to purchase and maintain a home.
1. Of sound mind: Do you have clarity about the responsibilities of home owning?
One of the first signs that someone is ready to purchase a home is that they are clear that they are prepared to stop renting. Yes, renting is more manageable than owning property, but the benefits of homeownership, such as building long-term equity, prove it to be a worthwhile investment.
Homeowner equity value in the U.S. has increased from $8.77 trillion in 2010 to $21.1 trillion in 2020, according to Statista. In addition, purchasing a home is 38 percent more cost-effective than renting, found online real estate marketplace Trulia. Mortgage payments are fixed, meaning they do not change, while rent will consistently rise.
“You’ve made it up in your mind that you are done renting and paying your landlord’s mortgage,” says Tashea McDougald, a realtor with Samson Properties. “You understand the benefits of homeownership and have realistic desires to own a home.”
2. Money management on lock: Do you have a reliable income and manageable debt?
Prospective homeowners must have a predictable source of income as part of the consideration for a home loan. Here’s why: Mortgage lenders want to see at least two years of steady income. It reveals that a person is committed to maintaining their financial standing to afford a long-term payment such as a mortgage.
“Examine your career and financial situation to see if you can afford to buy a property,” said Andrew Yu, acquisitions manager with MidSouth Best Offers. “If your career is doing well and there are opportunities for advancement soon, you may have enough income coming in to pay for a home.”
In addition to having a consistent income, a prospective homeowner must also have manageable debt. The debt-to-income ratio will determine how much a financial institution can provide in a loan, and monthly mortgage payments should not exceed 45 percent of a homeowner’s monthly income.
3. Do you have the points? You need an eligible credit score
A homebuyer’s credit score will not only determine if they can get a home loan but also their interest rate. The higher a credit score, the lower an interest rate. At present, 640 is a qualifying score for an FHA loan and 660 for conventional loans.
4. Money stacked: Have you saved for your home purchase and beyond?
Anyone interested in purchasing a home should have at least six to 10 percent of the desired purchase price. If using a Federal Housing Authority loan, the down payment will be at least 3.5 percent. In addition to the down payment, a prospective homebuyer will also need money to cover closing costs, taxes, inspection, appraisal and insurance.
5. Do you have an emergency fund?
When owning a home, it is best to expect the unexpected. In addition to routine upkeep and repairs, there are moments when homeowners have to pay for major repairs and will need to have money available without placing themselves in financial jeopardy.
Experts consistently suggest saving at least 1 to 3 percent of a home’s value as emergency savings. That means if a home is valued at $500,000, a homeowner should have at least $5,000 to $7,500 in an emergency fund.
If someone is committed to the idea of homeownership and is ready to take the plunge, it’s time to begin researching where they’d like to buy, getting preapproval for a mortgage, and building a realtor.