Important Topics:
Homeownership
Are you ready for homeownership?
Buying a home is the largest purchase most people will ever make. Homeownership has great benefits, but it
also comes with certain responsibilities. Look at your current situation and factors like your credit history, risks
and costs to determine if owning a home is right for you.
Credit History
Do you have a continuing and reliable source of income prior to applying for the loan? If you're thinking about
buying a home, you should also be thinking about your credit. The first step in the home buying process is to
understand your credit. When you apply for a mortgage, lenders will review your credit report. Your credit
report is a history of how you've managed your finances: it's a record of money you've borrowed and your
history of paying it back. Your credit report is a record of all your credit transactions whenever and wherever
you've used credit to purchase goods and services. Your credit will have a big influence on whether or not you
can get a mortgage, the terms of that loan, and the interest rate. If you have good credit, you may have a much
wider range of mortgage offers with lower rates.
Be aware of how important your credit history is to the process. Two big issues are establishing good credit and
protecting your credit. Routinely look at your credit report and credit scores. Make sure you correct any
mistakes on your credit report right away.
What Are the Risks?
Once you feel are you are ready for homeownership, determine if your total debt is manageable and you can
afford to take on the costs associated with homeownership. 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.
So what are the risks of homeownership?
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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.
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.
Down Payments and Closing Costs
You’re ready for a home and you are aware of the risks. Now you need to think about money for a down
payment and closing costs. When you buy a home, there are several up-front costs you should be aware of,
particularly down payments and closing costs.
Student Money Management Center | 237 Nebraska Union | Lincoln, NE | 68588-0461
http://www.unl.edu/smmc | smmc@unl.edu | 402-472-9093
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Important Topics:
Homeownership
Down payments
A down payment is usually between 3% and 20% of the total cost of the home. The amount of the down
payment depends on your credit history, income, the cost of the home, and the type of mortgage you choose.
Some lenders also have loan options that allow for no down payment at all.
If your down payment is less than 20%, you will need private mortgage insurance (PMI). This is insurance you pay
to protect the bank if you don't repay your loan in full. PMI is added to your closing and monthly mortgage
costs. When you apply for a home loan, many mortgages require you to also have at least two month's worth of
mortgage payments saved, called reserves. However, there are mortgages that do not require reserves. Most
lenders want to know the source of your down payment and have restrictions about how much can come from
gifts from your relatives. In most cases, these gifts will need to be documented. Ask your lender for more
information.
Closing Costs
Closing, or settlement, costs are fees you pay when you actually get your loan from your financial institution.
These include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed, and other
settlement costs.
Closing costs generally range between 2-7% of the loan value. You'll receive an estimate from your lender after
you apply for a mortgage. You must pay these costs at the time you close on your loan.
Advantages to Homeownership
Once you fully understand your current situation, it's important to look at the pros and cons of homeownership
to make the best decision for you and your family. 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.
Student Money Management Center | 237 Nebraska Union | Lincoln, NE | 68588-0461
http://www.unl.edu/smmc | smmc@unl.edu | 402-472-9093
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Important Topics:
Homeownership
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 mortgage lender, a housing counselor, or consumer credit counselor can help you better
understand these guidelines. Don't forget that you also have to save for the down payment, closing costs,
inspections costs, moving, and other related expenses.
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 still can buy a home with less-than-perfect credit. And 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 payments. But
remember 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 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.
Myth: If you're late on your monthly mortgage payments, you'll lose your house.
Fact: If you have a financial hardship, like a death 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.
Student Money Management Center | 237 Nebraska Union | Lincoln, NE | 68588-0461
http://www.unl.edu/smmc | smmc@unl.edu | 402-472-9093
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Important Topics:
Homeownership
Note: This paper was written by representatives at the University of North Texas Student Money
Management Center and is being used by permission of the University of North Texas Student
Money Management Center.
Source: http://www.andersonkemp.com/residential/ishomeownershiprightforyou.asp
Student Money Management Center | 237 Nebraska Union | Lincoln, NE | 68588-0461
http://www.unl.edu/smmc | smmc@unl.edu | 402-472-9093
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