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Are You Ready To Buy A Home? A Renter’s Checklist

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With home prices lower than they’ve been in a decade, mortgage rates lower than ever and rents on the rise, the nagging question on many renters’ minds is if now is finally the right time to buy a home.

But as anyone in this situation will tell you, this decision is hardly based on prices or interest rates alone.

Often, people start thinking about buying a home because of a life change — a baby on the way, a new job, or starting a business from home. These can be stressful times in themselves and adding a big decision like whether or not to buy a house can be overwhelming.

With that in mind, here are five factors to guide your decision.

The Market

Home prices may be low, especially compared with where they were five years ago, but that’s not enough to determine the state of your local real estate market.

In many areas, for example, economists expect prices to continue to decline — but not everywhere, and not in every home category. In other areas, meanwhile, rents have increased and prices have dropped to the point where it’s cheaper to buy a home than rent it.

A common measure in determining home affordability is the price-to-rent ratio in a given area. Simply divide cost to own a house (a crude measure here is the purchase price) by the annual rent you’d have to pay to live in a similar property in that neighborhood. Roughly speaking, a price-to-rent ratio of 20 or higher means that it still makes financial sense to rent, rather than buy.

Your Cash Flow

Rents are increasing in many areas, while home prices are falling. But even if you land a bargain-priced home, chances are, you’ll have some expenses you’re not used to dealing with as a renter. Property taxes, homeowner’s insurance, maintenance and repairs, and sometimes even some utilities, have all been part of your monthly rent payment, but now you’ll be responsible for all of it. Make sure you create or alter your family budget to account for any increase without compromising too much.

Your Time Horizon

One of the primary advantages of owning over renting is that part of your monthly payment goes back to you in the form of home equity. That’s one of the main reasons many consider buying, but remember that building equity isn’t guaranteed — just ask the millions of homeowners who bought at the peak of the housing market and are currently “underwater” — or owe more on their mortgage than their homes are worth.

This is where your time horizon comes in: if you plan to live in that house long enough, you could simply wait out any price dips and still sell your home at a profit. A time horizon of at least five to seven years is generally recommended.

Your Credit Health

Mortgage rates may be at historic lows, but that doesn’t mean you’ll qualify for the best rates available. The main factors that will determine your mortgage rate are your debt-to-income ratio, the type of loan you get, the size of your down payment and, of course, your credit. It’s a good idea to shop for rates and get pre-qualified ahead of time, so there aren’t any surprises after you have your heart set on a home.

Personal Timing

Whatever your reasons for considering a home purchase, it’s important to do some soul searching and make sure this is the right time in your life for such a move. Buying a house, whether it’s your first or your tenth, should be a joyous, exciting experience, so even if the market and the rates are perfect, be sure it’s the right time for you and your family.

Once you’ve evaluated the above factors and decided to purchase your own house, set about making a list of what you’re looking for, not just in a home, but in a neighborhood, schools, commute, and everything else that goes with moving to a new home. Buying a home is a big decision, so take your time, be thorough in your search, and hold out for what you want. In the long run, you’ll be glad you did.

Matthew Toren writes for Contently.com, which contributed this post exclusively for Credit Sesame.

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