According to many, the American dream has always included owning your own home. That dream turned into a nightmare for millions of Americans during the Great Recession, which started when the housing bubble burst at the end of 2007. Families across the nation, and Oklahoma, were forced into renting when they lost jobs, income, and their homes. Regardless of your situation, you may be asking yourself what is best for me, buying or renting? This is National Homeownership Month and CCCS of Central Oklahoma wants you to know we offer free help and valuable information to those who are weighing their housing options.
Housing counseling can help you understand and learn more about your housing rights, responsibilities, and options. In fact, studies have shown people who receive housing counseling are often more successful and satisfied with their choices. We have provided some basic information about buying versus renting. However, you are encouraged to call us if you are considering housing options. We are a HUD approved non-profit housing counseling agency and this counseling is free!
The Options
First, let’s take a look at some pros and cons with renting a home.
Renting: Pros Cons
Maintenance issues You won’t build equity.
are usually the landlord’s
responsibility, so if the You are not free to make
water heater breaks, you won’t changes to the building with-
have to pay to fix it. out the landlord’s approval.
You don’t have to pay any If you have an unexpected
property taxes. emergency (i.e. medical) &
your income drops, causing
Renter’s insurance may be you to fall behind on your
significantly cheaper than rent, you can be evicted in
homeowner’s insurance since Oklahoma in 30 days. Home-
renters only need to worry owners who fall behind may
about insuring their contents. be able to work with the bank
to find a solution to avoid
If you are looking for short- foreclosure. If foreclosure
term housing, renting may be best. did occur, you would have
about 6 or 7 months (in Oklahoma) before eviction.
Let’s take a look at a few pros and cons associated with homeownership.
Homeownership Pros Cons
If your property value increases, If your property value decreases,
you could make a nice profit you could lose money if you had
whenever you sell the home. to sell the property. This can be
problematic if you are forced to sell
You can paint the walls, tear out due to an unexpected loss of income.
walls, pave your front yard in
concrete, anything you want(as In addition to a house payment, you
long as you comply with city must also pay property taxes and
building codes). homeowner’s insurance.
Part of your monthly house pay- If you suddenly lose income
ment goes to paying down the and can not afford a payment,
loan balance, and part goes to you can not just give notice
interest, which is the lender’s profit. and walk away. You are under
You can count the interest contract (the mortgage) to pay one
as a tax deduction. monthly payment until the loan is
paid in full.
You can provide stability to your
family knowing that a landlord If you don’t pay the loan in full and
won’t decide to change the rental on time, the lender can foreclose and
agreement or decide not to renew sell your property at auction and
the rental agreement because they evict you. If the lender loses money
want the property for themselves, they will sue you for those losses
or because they want to sell the and the unpaid mortgage balance
property. can be considered taxable income by
the IRS.
If homeownership is something you want to pursue, then there are several steps you will want to take before you ever start house hunting. The first, and perhaps biggest question you need to answer is, “Can I get approved for a mortgage loan, and how much can I realistically afford?”
CCCS of Central Oklahoma Offers Free Budget Counseling
And Credit Report Counseling!
Call 405-789-2227 or 800-364-2227
Credit Reports and Your Budget
Lenders look at a laundry list of items when considering a mortgage loan application. If approved for a mortgage, you may be approved for far more than you can actually afford since lenders look at your pre-tax (gross) income, not your after tax income (net). Lenders look at the debt listed on your credit report, but they may not take into consideration you might have an expensive hobby or a personal obligation to provide monthly financial help to a family member.
Start with your budget. Write down everything that you spend each month. Also figure into your budget savings. You will need that savings to purchase gifts throughout the year, fix the car if it breaks down, make home repairs (if you buy a home, you may need to replace stuff when it breaks, like faucets, air conditioning, etc). Write down all expenses:
- Food (groceries, school and work lunches, dinners out)
- Transportation (car payment, gasoline, oil changes, car insurance, tolls)
- Medical needs (doctor co-pays, medications, first aid supplies)
- Household supplies (cleaning products, paper products, etc)
- Utilities (water/sewer/garbage, electric, cable, cell phone, landline, natural gas)
- Credit card and loan payments
- Hobbies/Club Dues/Membership Dues
- Entertainment
- Pets (dog/cat food, litter, vet visits)
- Other stuff
Once you have listed all expenses, compare that monthly amount with your monthly take-home pay. The difference between what you make and what you spend is what’s left for a house payment. A general rule of thumb says your house payment should not consume more than a third of your income.
Remember, if you are buying a home for the first time, you need to allow for the monthly payment AND taxes and insurance. Most mortgage payments include four components:
- Principal (pays down loan balance)
- Interest (lender’s profit)
- Taxes (1/12th your annual property tax bill)
- Insurance (1/12th of your annual homeowner’s insurance cost)
When you apply for a mortgage loan, the lender will look at your credit report and credit score. Once per year, you can obtain a free copy of your credit report from the three credit bureaus, which are: Experian, Equifax and TransUnion. For your free credit report, visit annualcreditreport.com
If you see items that are incorrect on your credit report, you can dispute them and the credit bureau will investigate, and if the item in question is in fact incorrect, they will remove it.
Once you have determined what you can afford, and you’ve checked your credit to see that it is clear of any derogatory items, then you are ready to visit some banks and mortgage companies to see what kind of interest rates and down payments are required.
Most lenders require a down payment of 20% of the purchase price (a $100,000 house may require a down payment of $20,000). There are down payment assistance programs (DPA’s) available in many areas. So if you don’t have enough money (or any money) to use as a down payment, you may want to check into DPA’s in your area.
Other items lenders will consider when reviewing your loan application include:
- Length of time with current employer
- Length of time you have lived in your current residence
- Debt to income ratio (how much of your income is already needed to pay existing debt)
- Payment history on all debts and rents
- Value of the home you want to buy compared to its’ purchase price (referred to as loan-to-value)
Homeownership is a big step. A home is often the biggest investment a family ever makes. It is important to do your homework, understand all costs and benefits, and make a decision that best for you and/or your family.
CCCS of Central Oklahoma Offers Free Budget Counseling
And Credit Report Counseling!
Call 405-789-2227 or 800-364-2227
