8 Questions to Ask Yourself When Deciding to Rent or Buy a House

Buying a home isn't for everyone. These questions will help you sort out whether it's a good financial move for you.

If you’re at the age when your peers are making major life moves — getting married, having kids and buying homes – you might be feeling it’s time to join them. Or you may simply just be at that stage all on your own.

Either way, plenty of young adults are starting to get the home-buying itch. While there are a lot of appealing benefits to homeownership, taking on that kind of debt is not without risk. The decision to rent vs. buy is one you should make carefully.

If you’re trying to figure out your next move, consider asking yourself these eight questions. The answers should steer you in the right direction.

1. What Is My Top Financial Priority?

Buying a home will slow down your ability to make progress on other financial goals. You’ll need to focus on lowering expenses or increasing your income so you can afford a down payment and monthly mortgage payments. (This guide can help you understand more about how to determine your down payment on a home.)

That extra cash will be funneled toward your mortgage rather than paying off credit cards or student loans if you have them. Other financial goals, such as saving for retirement and building an emergency fund, may also have to take a back seat.

Assess your competing financial goals and decide which ones take priority. Buying a house might come first in your book, or perhaps you’ll decide to work toward other money goals before committing to a mortgage.

2. Do I Have Savings For a Down Payment & Closing Costs?

Renting requires some savings – you’ll need enough cash to cover the first month’s rent and the deposit.

To buy a home, however, the minimum you’ll need to have saved is usually 6% or more of the home’s value. Even FHA loans require a minimum down payment of 3.5%, and closing costs add another 2-3% to the costs.

But that’s the minimum; a 20% down payment is better to give you a decent amount of equity and avoid private mortgage insurance.

If you don’t have sufficient savings, you’ll need to focus on saving for a down payment before you’re in a position to buy. And even if you do have savings, it’s worth it to think through the best use of those savings and whether you’d rather allocate that cash to other goals.

3. How Do Home & Rent Prices Compare?

Housing markets also affect whether it’s a better idea to rent versus buy. If you’re facing sky-high rent prices that climb each year, a mortgage starts making a lot of sense. On the other hand, if you want to live in an expensive area, you could be priced out of buying a home (especially without extensive savings).

4. How Long Do I Plan to Live Here?

The longer you live in a home, the more likely it is that the financial investment of buying a property will pay off.

If you like your city, have a steady job, and are ready to live in the same space for a few years, buying is often more cost effective, but not always. You may want to crunch the numbers to see how long you’d need to live in a home to break even on your initial costs.

5. Will I Qualify for a Good Deal on a Mortgage?

You’ll need a decent income and good credit to qualify for the lowest rates and best terms on mortgage loans. It’s sometimes possible to get a mortgage if you have bad credit, but you’ll pay a lot more over time. (Haven’t checked where your credit stands? Now’s the time. You can get your two free credit scores, updated every 14 days, on Credit.com.)

Think of it this way: most mortgages last 30 years. With that in mind, you may see that it’s financially worth it to spend a few months to a year rebuilding your credit if it means qualifying for a lower interest rate for those 30 years. For example, if you boost your credit score by 50 points – from the mid-600s to over 700 – you could qualify for a mortgage rate that’s 80+ basis points lower, according to MyFICO.com.

6. What Other Costs Will I Be Responsible for as a Homeowner?

When comparing costs of renting versus buying, make sure you’re including home-owning costs beyond mortgage principal and interest.

There are escrow costs, homeowner’s insurance, and property taxes. You can expect home maintenance costs to equal 1-3% of your home’s sale price each year. Then there are homeowners’ association fees and new utility costs such as trash collection and water. Meanwhile, renters are usually not responsible for any of these costs.

7. Am I Comfortable with the Risks of Owning a Home?

It’s a popular argument that owning is smarter than renting because you’re investing in a home. But as with any investment, owning a home has its own inherent risks.

There are no guarantees you’ll get a good return on your investment. Just ask the many homeowners who defaulted on their homes after the 2008 mortgage crisis. And even in a strong housing market, there are the everyday risks of unemployment or other financial hardships.

8. How Would Renting vs. Owning Affect my Lifestyle?

Guiding forces in your decision to rent or own are your lifestyle and values. For many, the freedom of choice, privacy, and control that come with owning a home are big selling points. Other people might prefer the convenience, flexibility, and short-term commitment that comes with renting.

Know what you want and choose a housing setup that will help you achieve it. Owning a home can be an admirable accomplishment for some people. Maybe it will be for you, too. Only you know the answer.

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Freelancers: Here’s What You Need to Know About Getting a Mortgage

When it comes to mortgage loans, there’s a special exception for freelancers, business owners, and even Realtors.

When my husband (then fiancé) and I began preparing to purchase our first home, I was a burden.

I know what you’re thinking — my writing career as a freelancer simply must not have been generating enough money to allow me to contribute, and I needed to ride on the coattails of my fiancé’s full-time job and steady paycheck to get the home of my dreams.

Given the reputation of a freelancer’s income, I don’t blame you. And having started on this new career just months before house hunting, I actually was a little strapped for cash.

However, it wasn’t my uncertain income that excluded me from the mortgage-qualifying round. Despite my limited pennies, I was more than willing to be an equal partner in the house-buying process.

The bank? They had different ideas — ideas I didn’t even know existed until I was in the thick of it all. They told me my income would not be considered when pre-approving us for a mortgage loan amount. Instead, the loan would be based on my fiancé’s income alone.

This came as a surprise, to say the least. So I’ve made it my mission to spread the word to others who might find themselves in the same boat. Let’s break this down, shall we?

What Freelancers Need to Know

When it comes to mortgage loans, there’s a special exception for freelancers, business owners and even real estate agents — basically, it’s a rule for people who are self-employed with a sporadic income.

So, what exactly is this rule? Well, the bank told me I needed two full years of freelancing income history for them to consider for our loan amount. (Shopping for home loans? Be sure to check your credit first. You can view two of your free credit scores, with updates every two weeks, on Credit.com.)

Be warned: These specific restrictions might vary from bank to bank, so you’ll want to talk to your own lender to determine what you need.

The general rule is that you’ll need to share 24 months’ worth of income history in the form of your personal and business tax returns. They average those two years to get a general idea of how much you make during a typical year, which they can then use to determine what size loan you could realistically handle. (You can see how much house you can afford here.)

Since I had only been freelancing for a handful of months, I had next-to-no information to share with them. My business was just getting off the ground — I barely had two months of income to report, let alone two full years.

So we were left with a choice: Either we could wait for two years until I had built up a solid enough income history as a freelancer for them to consider, or we could qualify for a loan using just my husband’s income.

The latter option was a little demoralizing. I was making money, so why couldn’t I be an active part of the purchasing process? Why was I being punished by having to take a backseat and watch my fiancé sign his name on that pile of paperwork? Starting my own business as a freelancer was a scary enough leap without being made to feel like a lesser half of our partnership.

However, it didn’t take me long to begin to understand where the bank was coming from. It’s a risk to lend money to a freelancer — someone who might make $7,000 one month and $700 the next. But just because I could understand it, didn’t mean I liked it.

So my fiancé and I worked out an arrangement so I could still feel like I was involved in our home purchase. I wrote him a check to contribute to our down payment, and we continued to shuffle money around between the two of us to cover the mortgage and other living expenses until we were married and shared joint accounts.

It was a bit of a roundabout way to involve me in the process, and it still had its frustrating moments.

As a freelancer, I still work full time — just not in the way a bank can calculate. But in the end, it was actually a good thing. The fact that we received our loan amount after reporting only my husband’s income means we took on a loan and bought a house priced well within our budget.

While the process was far from painless, knowing we’ll never be house poor? Well, that’s priceless.

Image: Peopleimages

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The Fastest Way to Save for a House

There are a few ways to expedite that down payment.

Once you’ve decided it’s time to buy your own home, saving for that 20% down payment is step one toward doing it. Instead of waiting years, here are six ways to help you save up for that down payment in a matter of months.

1. Explore the Market

If you are saving money to buy your dream home, consider taking a detour through a lower-priced neighborhood first. Buying a lower-cost home means you won’t have to save as long for the down payment. As the home’s value goes up, you can use the equity you’ve built to help you get into a higher-priced home later on, particularly if you find a fixer-upper and you’re good at repairs.

2. Keep Your Priorities in Focus

While it may be tempting to put off other priorities when trying to save for an important goal, Kevin Gallegos, vice president of Phoenix operations at Freedom Financial Network, says paying the rent should always be your first priority. Next, Gallegos says, pay down credit card debt.

“Few, if any, investments will return as much,” he explains. Additionally, having more available credit on your card will improve your debt-to-income ratio and creates a financial cushion that you may need for unexpected costs after moving in to your new home.

3. Automate Your Savings

You can create a budget based on your current expenses to determine how much you can save each month. Once you have determined how much you can afford to save, automatically transfer that amount from your checking account to a savings account.

“Save before you ever have the money in your hand,” Gallegos says. “Record this expense like a bill every month.”

4. Generate More Income

To raise money quickly, Gallegos says it pays off to turn your spare time into money-making opportunities. Look around your apartment for unneeded items to sell online or have a yard sale.

“Even small proceeds can accumulate surprisingly quickly,” he says. “Maybe you have skills where you can turn a hobby into a part-time, money-making enterprise. Babysit, tutor, do yard work or other part-time work.”

5. Track Your Daily Expenses

Before pulling out your wallet, ask yourself how badly you need to buy something. For example, if there is free coffee at work, do you really need to go to the coffee shop every morning? Gallegos admits it sounds cliché to ask such questions, “yet this is just the type of disciplined act that will get someone on track to saving as much as possible as quickly as possible,” he says.

To further reduce daily spending, Gallegos recommends paying with cash instead of using a debit or credit card. “Many studies report that people spend up to 15 to 20% less when paying with cash,” he says.

6. Reduce Household Expenses

There are many ways to reduce monthly expenses at home that can help build your savings for a down payment more quickly. Washing clothes in cold water saves up to 90% of the energy expended in the washing cycle, notes Gallegos. Switching to cold water will directly reduce next month’s utility bill. Plus, speaking of laundry, skip the dryer. That’ll eliminate carbon emissions and help you bank away extra dollars, he adds.

You should also eliminate drafts in your home and turn the hot water temperature down to 120 degrees, which will save you money. Per EnergyStar.gov, a house’s water heater “can waste anywhere from $36 to $61 annually in standby heat losses and more than $400 in demand losses.”

Implementing only one of these ideas may not increase your savings significantly, but if you try a few of them, it can make a real difference to your savings account after a few months and get you on the right track to having enough for your new home.

[Editor’s Note: A good credit score can make buying a new home more affordable, too, since it’ll help you qualify for a low interest rate. You can see where your credit stands by viewing two of your scores for free on Credit.com.]

Image: monkeybusinessimages

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50 Things to Do If You Plan to Sell Your Home This Spring

Sure, it's a seller market. But getting the best price for your house involves more than just putting down For Sale sign stakes.

Have you heard? It’s a seller’s market. Well, in most zip codes at least. But a hopping homebuying season doesn’t necessarily mean your home will go well over asking price just by putting up a For Sale sign. There’s still plenty a seller must do if they want to get the best price for their soon-to-be-former digs.

Here are 50 things to do if you plan to sell your home this spring.

1. Learn the Market

The reports of a seller’s market are greatly exaggerated — which is to say every zip code is different. If you want to expedite a sale, your “property has to be marketed properly and be priced appropriately,” said Glenn S. Phillips, CEO of Lake Homes Realty. “The feeding frenzy of a few years ago has not returned, and buyers are better informed than ever.”

2. Avoid Over-Pricing

Gradual price drops signal to house hunters that more decreases are to come, Phillips says. Plus, if your home sits on the market long enough, prospective buyers will wonder what’s wrong with it. “In the end, most homes that start overpriced sell at a price lower than a home priced [appropriately] from the start,” he said. “And the deal happens much faster and without the pain of months trying to sell.”

3. Hire a Realtor

Yes, you’ll have to pay them a commission. (Side note: You’ll be expected to cover the buyer’s agent, too.) Still, a good Realtor can be instrumental when it comes to the whole “learn-the-market, price-it-right” stuff. Plus, they’ll do the heavy lifting when showing the house and negotiating offers. Of course, be sure to …

4. Vet Prospective Agents

“Find someone who is in the business full time and who can demonstrate their skill at listing a house,” Reba Haas, CEO of Team Reba at RE/MAX Metro Inc. in Seattle, said. “This will show up in their print materials, online photos, services provided marketing presentation and ability to find the right price range to help you sell in a reasonable amount of time.”

5. Get a Home Estimate …

Yes, your real estate agent can help you set the right price on your home, but it doesn’t hurt to get a general idea of the pricing in your area on your own. There are plenty of sites online that can help you get an idea of your home’s current value.

6. Or, Better Yet, a Pre-Listing Appraisal

That’ll help preclude any problems during the bank appraisal. “An independent appraisal performed prior to listing can determine the value that a lender would assign your home,” Bruce Elliott, president of the Orlando Regional REALTOR Association, said. “While the process is never scientific, many buyers do find an independent appraisal to be a credible source for judging a home’s value.”

7. Determine How Much the Sale Will Cost You

Because there are plenty of expenses associated with selling a home. “A lot of sellers are not aware of what their costs are, including attorney, commission to broker and any other closing costs, including potential repairs before putting the home on the market,” says Kobi Lahav, managing director, Mdrn. Residential, a real estate brokerage in New York City. Fortunately, your broker or listing agent can help you pin down a rough estimate of what you might have to shell out.

8. Hire an Attorney

They’ll be instrumental when it comes time to negotiate the purchase contract with your chosen buyer, but you’ll, of course, want to …

9. Research Their Reputations (& Fees)

Ask friends and family for recommendations, or do a search online to find an affordable real estate attorney you can trust.

10. Ask for a Mortgage Pay Off Quote

You may think you know how much you owe on your mortgage. However, “it is not always what you see on your lender’s website,” Denise Supplee, co-founder of SparkRental and Pennsylvania Realtor, says. “And it is a good idea to have that information, especially if the money from your sale is going towards another sale.”

11. Build Your Coffers

Like we said, selling your home can be very costly. Be sure you’ve got an adequate emergency fund on hand to cover the costs, moving expenses and mortgage or rent associated with your next abode.

12. Check State Tax Records

“Make sure any debts you thought you paid off, were, in fact, posted in municipality tax records [and] satisfied,” Janice B. Leis, Accredited Buyer’s Representative and associate broker with Berkshire Hathaway, says. “Otherwise, you will have an arduous task getting issues resolved if faced with either a quick closing or finding out by the title company near closing, when life is hectic.”

13. Consult an Accountant

Or a trusted financial adviser before putting down For Sale stakes. They can fill you in on any tax deductions or bills associated with the sale that you’ll be expected to pay next year, Leis says.

14. Pull Your Credit Reports

In addition to liens, look for any judgments because those can go against the title of your home. “I have seen … people who thought they were getting X amount of dollars find out that they owe back taxes from many years ago,” Supplee says. (You can pull your free annual credit reports at AnnualCreditReport.com.) If you’re also searching for a new home while you’re trying to sell yours, well, then, you’ll want to …

15. Get Your Full Credit Check On

Because the better your credit score, the more affordable your new mortgage will be. Check for credit report errors, because they may be needlessly weighing you down. If you find one, be sure to …

16. Dispute Any Errors …

You can go here to learn how to handle errors on your credit report.

17. … & Otherwise Shore Up Your Scores

Beyond that, pay down high credit card balances, limit new credit inquiries and address any other credit-score killers to improve your credit scores. You can monitor your progress using your free credit report summary, along with two free credit scores, updated every 14 days, on Credit.com.

18. Set Realistic Deadlines

“It takes a lot of time to prepare a home for sale,” Haas says. “Be realistic in what you can do, and consider where you may need help from family, friends or by hiring professionals.”

19. Map Out Your Move

“If coinciding with a closing and purchase, make sure there is a contingency in your purchase contract,” Reis says. “Otherwise you owe on two properties or will be in default on new purchase due to lack of proceeds from the sale of your existing home.”

20. Get a Pre-Home Inspection Home Inspection

Sure, it’ll cost you. Still, “spending a few hundred dollars on a thorough home inspection can help you get a better idea of what repairs need to be made, and more importantly, what your net proceeds will be from the sale of your home,” Emile L’Eplattenier, a New York City real estate agent and member of the Real Estate Board of New York, says.

21. Make Any Major Repairs …

Pay particular attention to roof and air conditioning issues, as buyers tend to shy from expensive repairs, Elliott says. “Completing as many repairs as your budget allows will pay off when potential buyers are not put off by the amount of time or money they would need to bring the home up to speed,” he adds.

22. … & Consider Some Small Upgrades

“Replacing old curtains and blinds or even appliances and fixtures will make your home look better in pictures and on showings,” L’Eplattenier says. At the very least …

23. Paint

So long as you don’t use one of these four colors, of course. By the way …

24. Carefully Consider Major Home Improvement Projects

Fix the roof, sure. Have the AC serviced, but consult with your Realtor or stager before blinging out the bathroom or wallpapering the basement. Certain home improvements that seem like a good idea may not actually bring any value to your home — or, worse, could be a turnoff to potential buyers. (We’re looking at you, outdoor bathtub.)

25. Get Your Disclosures Ready

Though there are variations by city or state, some types of seller’s disclosure are generally mandated by law. “If you know of an issue in your home, write it down on the disclosure form provided by your Realtor,” Elliott says. “Nothing is too small to disclose, and failing to disclose is a serious breach of real estate law that can undermine the sale or worse.”

26. Trim the (Furniture) Fat

“Too much furniture makes a home look smaller than it really is, so sell or move out furniture to make the home feel more spacious,” Phillips says.

27. Tap a Photographer …

And consider hiring a professional. Solid listing photos make a big difference when it comes to getting buyers over to your house.

28. … But Clean Your Windows Before Showings

“Multi-exposure photography … will make the photos really stand out, but if the windows are dirty, you don’t get the best shots,” Haas says. “Plus, cleanliness in general just makes for a better showing.”

29. Actually, Clean Everything

We’re spelling this out just in case you hadn’t taken the initiative to do so already. “Nothing turns buyers off like grime, odor and general dinginess,” Elliott says.

30. Grout & Glaze

“How does the bathroom look?” Max says. “Do you need to reglaze the tub or put new grout on the tile?”

31. Set the Stage

Your Realtor can provide some valuable insights into how to organize your (leftover) furniture. “Stagers can also help you organize your furniture, and they can bring in just a few pieces that accentuate the positives of your home,” Kathryn Bishop, Realtor with Keller Williams Realty in Studio City, California, says.

32. Change the Light Bulbs

Lighting can be just as important as furniture feng shui when it comes to attracting homebuyers.

33. Up Your Curb Appeal

“Neatly trimmed bushes, fresh mulch and a colorful pot of flowers work wonders on that all-important first impression,” Elliott says. “Repainting (or washing) the front door and pressure cleaning the driveway and sidewalks are also simple tasks that provide eye-catching results.”

34. Find a Place for Fido

Sure, Sparky is cute and all, but you’ll want your pets out of the house during any showings. Plus, “it will always bring questions about any pet damage or difficult-to-remove smells,” Phillips says. Speaking of smells …

35. Deodorize …

Homeowners become smell blind and don’t realize how powerful smell is to homebuyers,” he says. “The home should smell fresh and clean, not perfumed and not like cats, dogs, cigarette smoke, old furniture, mothballs, mold, old food, gym locker or just plain stale.”

36. … De-Personalize …

Pack away those personal pictures and mementos. “Removing these items helps buyers imagine themselves in the home,” Phillips says.

37. … De-Clutter …

That goes beyond offloading some excess furniture and your picture words. Bottom line: It’s time to put all those books, toys, video games and figurines away. “The more crowded the apartment is, the smaller it appears,” Stacey Max, the sales manager of BOND New York, a residential brokerage, says.

38. … & Detach

“Sellers are usually emotionally attached to their homes, which is natural,” Lahav says. “However, they have to remember that any potential buyer is looking at it without the emotional aspect that the owner has for his own property.”

39. Clean Out Your Closets …

“They should look roomy,” Max says.

40. … & Your Drawers

“We all say that one day we will go into all the rooms and drawers and throw out a lot of old items,” Lahav says. “Selling your home is the best time to do it.” In fact, while you’re at it, go ahead and …

41. Start Packing

You’ll have to do it sooner or later. Might as well get a head start.

42. Store

You don’t have to junk all your belongings — or avoid decluttering just because you don’t want to part with your old Buffy the Vampire Slayer box sets. Consider renting out a storage space or keeping some stuff over at a friend’s or family member’s place while you’re trying to sell.

43. Talk to Your Neighbors

Consider this part of your curb appeal project — especially if you’re selling an apartment, co-op or condo. “You want your neighbors to be aware that there will be open houses,” Lahav says. “Buyers coming to view your home and see unhappy neighbors who look mad that the elevator [doesn’t] work or the driveway is blocked will assume that the neighbors are nasty, and that can affect their decision.”

44. Do a Final Walk-Through

Just to be sure there’s nothing you missed with regard to repairs, curb appeal or staging your home.

45. Advertise Amply

“Some sellers believe that it is OK to not put the home on the local MLS, that the agents in the area will just bring the perfect buyer,” Phillips says. “While this could happen, it rarely does. Doing this is like trying to sell a secret. The price does not matter because few buyers know the house is even for sale.”

46. Host an Open House

“Recently, my listings have all sold to buyers who came to the open houses,” Bishop says. Beyond that …

47. Be Available

“Appointments often come with only an hour’s notice,” she adds. “Work as smoothly as possible with your Realtor to accommodate showings.”

48. Adjust …

If you find you did list your home for more than it’s worth, go ahead and change your listing. (Again, consulting with your Realtor can come in handy here.)

49. … & Stay Flexible

“We’ve seen purchases fall apart over very small amounts of money, over a single appliance and over attitudes,” Phillips says. “Remember the big picture and how much it will cost to start over finding another willing and capable buyer. [Getting] the deal closed is often the best financial (and emotional) choice, even if you have to give up a little more than you wanted.”

50. Brush Up on Your Homebuying Skills

Chances are, you’ll be buying a new abode before or after you sell your current one, so you’ll want to go refamiliarize yourself with that process as well. Fortunately, we’ve got 50 things you should do as a house hunter right here.

Got more questions about the homebuying process? Ask away in the comments section, and one of our experts will try to help!

Image: Feverpitched

The post 50 Things to Do If You Plan to Sell Your Home This Spring appeared first on Credit.com.

This Common Mistake Can Kill Your Mortgage

If you're thinking about buying a home, you'll want to avoid this common mortgage mistake.

In order to qualify for a mortgage, you need to show your lender that you have a down payment and access to funds for closing. This money needs to come from documentable sources prior to moving it from your bank account to your escrow account. Unfortunately, a lot of people don’t do this, which can end up creating unnecessary challenges during the underwriting process.

Lenders are going to require at least 60 days of asset documentation from each source that your money comes from. This is required because your mortgage lender will need to verify that the money promised does exist and is eligible for use.

Let’s say you’ve put your money into escrow and, as requested, are doing your best to document the movement of money from the account going to escrow. This entails providing a bank statement specifically showing the money leaving your account and the money being accepted by escrow through an EMD (earnest money deposit).

If you can’t get a bank statement, though — say it’s the middle of the month and new statements are not out yet — the next best thing is to get a bank printout confirming the transaction and confirming the amount of money remaining in the account. (There are literally dozens of other things you also should be thinking about during the home buying process. Here are 50 ways you can get ready for buying your home.)

How a Bank Printout Can Help You Close

The bank printout must show the date of the transaction and the current timestamp of the printout, confirming that the money has been moved prior to the printout date. If the bank printout does not have this information, it will automatically halt the closing process of your loan and delay your loan contingency removal or extend your close of escrow date.

This method can be used for both your down payment and funds for cash to close. This is to provide authenticity for your account and to show clearly on paper that the account is yours and the money is yours to use. Banks and lenders require this information to be clear cut and “in your face.” Never assume that “common sense” will be enough.

Documents & Other Items You’ll Want to Avoid

Providing any of the following items in lieu of the bank printout will not work:

  • A bank statement with someone else’s name on it
  • Bank statement in trust
  • Pictures of bank statements taken from a smartphone or snapshot application
  • Bank printout with no timestamp and date

In addition, the bank printout and timestamp must show the remaining balance that is left in your account. For example, if you had $130,000 in assets and your down payment from this account was $50,000, your account statement should now show $80,000 remaining.

If you are looking to purchase a home, talk to a seasoned loan professional who can walk you through properly documenting the money required to buy your home. Also, take a few minutes to check your credit scores so you’ll know going in what kinds of terms you’re eligible for. You can get your two free credit scores, updated every 14 days, at Credit.com.

Image: GlobalStock

 

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Buying a House? You May Want to Avoid the 30% Rule

The 30% rule is a good place to start, but it’s not always the best gauge of how much should you spend on housing.

Ask someone the question, “How much should I spend on a house?” and there’s a good chance that they will respond with the 30% rule.

The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.

What Is the 30% Rule?

The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.

Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.

Is the 30% Rule Right for You?

When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.

Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.

Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.

Don’t Forget About Extra Costs

You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.

If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.

Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.

What Percentage of Income Should Be Spent on Housing?

But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.

HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.

Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.

You’re less likely to overspend that way. But it might mean a smaller, less expensive home.

Consider the 28/36 Qualifying Ratio

Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.

According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.

So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.

Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.

When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.

How Much Should I Spend on a House?

Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.

Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?

If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.

No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.

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Top 25 Cities for the Millennial Homebuyer

Borrowers under age 35 are starting to buy homes again. Here are the top 25 cities where they're doing it.

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3 Home Improvements That Can Ultimately Save You Some Money

There are a few money-saving home improvements you might want to put on your spring to-do list.

Spring has officially sprung, which means plenty of house hunters and home sellers are ’tis-ing the season. But if you’re settled in your humble abode, the warm weather can serve as a different inspiration. Yup, it’s the home improvement season, too.

Of course, major renovations aren’t in everyone’s budget and it’s best not to go into debt if your home doesn’t actually need repairs. (That’ll just hurt your bank account and your credit — you can see how your scores are doing for free on Credit.com.)

Still, homeowners hankering to get handy will be happy to hear there are a few simple projects that can actually save them some money — at least in the long run. Here are three projects you might want to put on your to-do list.

1. Go Green

Going green and becoming more eco-friendly is great for those interested in reducing their carbon footprint, sure, but, you can also benefit financially from making your home more energy-efficient.

Yes, you’ll have to have to make an initial investment, but green upgrades tend to pay for themselves by lowering your monthly utility bills. Plus, by incorporating eco-friendly solutions into your home improvement plans, you may also be eligible for tax rebates on the local, state or federal level next year. You can check with an accountant to determine if you can save on your taxes by going green with renovations. According to the U.S. Department of Energy, the top suggestions for making your home more energy-efficient are:

  • Insulated windows using low-emissivity coatings
  • Energy efficient refrigerators using advanced compressor technology or magnetic refrigeration
  • Water heaters using electric heat pumps
  • Loose-fill fiberglass insulation

2. Spring Clean

Sure, it’s cliche, but checking some tasks off your annual homeowner to-do list (get yours right here) can prevent a major repair and save you money down the line. As part of a deep spring clean, be sure to check your drains and gutters, service your A/C (which can keep it from breaking on the hottest day of the year), replace any window screens you removed during the winter and repair any shingles or bricks that came loose due to bad weather.

Of course, this also a good time to clean our your closets, cabinets and crawl spaces. Fewer things means less stuff to worry about. Plus, you may be able to make a buck or two selling your wares online.

3. Smarten Up Your Home

The idea of programming your home and all of its appliances to answer your every verbal command is certainly not one the average homeowner is going to entertain. However, there are some simple ways to smarten up your home that won’t break the bank — and, in fact, can save you in the long run.

For instance, you could look into installing smart thermostats, which can be programmed or learn to change the temperature in your house throughout the day. They’re designed to ensure you don’t heat or cool your house unnecessarily and, thus, can wind up saving you on utilities. Similarly, consider changing out all your incandescent light bulbs for Smart (and energy-efficient!) LEDs. You’ll have to put out some cash to do this, as LEDs bulbs cost much more than your regular old light bulb, but the swap should pay off in the long run because they also last longer and use less energy.  

Looking to lower more monthly bills? We’ve got 7 easy ways to lower your cable bill right here.

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How to Prepare Your Budget for Buying Your First Home

You're going to need more than just a down payment.

With the beginning of spring and more interest-rate hikes coming up, a lot of people are wondering if it’s time to make the jump from renter to homeowner. Of course, making such a move involves much more than browsing real estate listings and cobbling together enough for a down payment.

One of the most important things a first-time homebuyer can do is prepare their budget for this big financial event. We asked our partners and money-savers extraordinaire at Clark.com to share some of their best budgeting tips for people looking to buy a home this year. Here are Clark.com Managing Editor Alex Sadler’s responses, edited for length.

What Tweaks Should People Make to Their Budgets in Preparation for Buying a Home?

First of all, there’s a whole lot more that goes into buying a home than many people realize. I’m actually going through the process right now, and believe me, it ain’t like walking into a leasing office and signing up for an apartment.

When you’re preparing your finances for buying a house, here are a few steps you need to take first.

  • Get your credit in shape: The higher your credit score, the better deal you’ll get on a mortgage. The goal is to get approved for the lowest interest rate possible, so before you apply, make sure your credit is in good shape. [Editor’s note: If you’re not sure where your credit stands, we’ve got you covered. You can get your free credit report snapshot on Credit.com, and it’s updated every 14 days.]
  • Have enough saved for a down payment – and then some: A good amount to shoot for is 20% of the purchase price. If you put down less money, you still may be able to get a loan, but it’ll come with higher monthly payments. Plus, typically when you put down any less than 20%, you’ll need to have private mortgage insurance, which is another monthly bill to prepare for.
  • Prepare for other upfront costs: Home inspection (a few hundred dollars), closing costs (estimate between 2% to 5% of purchase price) and extra cash. Some lenders may require you to have some cash in the bank after the purchase is complete, maybe two to six months’ worth of mortgage payments.

In terms of your monthly budget once you’re in the house, a good rule of thumb is to spend no more than 25% of your income on housing – including mortgage payments, private mortgage insurance (PMI, if you need it), property taxes, homeowners insurance — all the monthly bills specifically tied to the house.

What Are Things Renters Don’t Have to Budget for but Homeowners Do?

Buying a house is exciting, but you need to go ahead and prepare yourself for unexpected expenses — that’s just the reality of owning a home. No more calling the landlord or leasing office to come fix something. Whether it’s a broken light bulb or a busted HVAC, the cost of that repair is coming out your pocket. Basically, you should overestimate how much money you’ll need to cover all of your expenses each month.

Give yourself a cushion to fall back on — cash savings you can dip into to pay for an unexpected repair or to cover your bills in case you lose your job or can’t work for a period of time for whatever reason.

A few other costs that come with owning a home: property taxes, homeowners insurance, disaster insurance required for homes in certain areas, higher bills (utilities, heating, air conditioning), maintenance — any and everything is your responsibility.

The bigger the house, the more expensive every single bill will be. Keeping up with regular maintenance is crucial in order to avoid bigger, more expensive repairs down the road

What Are Tips for Transitioning Your Budget From That of a Renter’s to a Homeowner’s?

Come up with a monthly budget to cover all of your expenses as a homeowner, and start living on that amount now. It will force you to save the money that you won’t have the luxury of spending once you own that house. Send it directly into savings so you don’t give yourself a chance to spend it.

How Can Homebuyers Make Sure They’re Not Biting Off More Than They Can Chew?

Just because you can qualify for a bigger house doesn’t mean you should buy one. The financial risks are extremely serious.

No one plans for unexpected setbacks like job loss, emergencies, medical issues — and if you aren’t prepared financially, one big unexpected event can be devastating not only to your short-term financial health but also your long-term finances. If you can’t pay the mortgage payments, the lender is coming after your house. If you have nothing to save each month, you’re giving up retirement savings and everything else that comes with being financially independent.

Bottom line: Buy less house than you can afford. And even on a less serious scale, you don’t want to live in a house that you can’t afford to furnish, or you can’t afford to take vacations because you have nothing left to spend or save each month.

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Foreclosure Picture Improves, but Some States Drag Behind

Foreclosures reached an 11-year low in February, but not every state is doing so well.

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