If you’re trying to find a rental or currently renting in Colorado Springs, then you are keenly aware of the crazy market we are currently experiencing. Rents nationally are rising at 2.7%, but rents in Colorado Springs went up by a whopping 11 percent over the past year. According to recent studies, Americans spend 30% of their monthly income on rent, while those who live in their own homes spend only 15% on mortgages. Now, there are also other costs associated with owning a home … repair costs, etc. But there may still be significant savings going from renter to owner, especially in the kind of crazy rental market we have here in Colorado Springs where rents are going up much faster than home values.
What’s your credit score?
Generally speaking, the higher your credit score the more money you can borrow…AND at a lower rate. So what is good and what is bad? Here’s a link that explains in more detail. To summarize:
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Credit score is the first thing lenders look at to determine if they will loan you money. It’s considered the primary indication of your likelihood to pay the money back. So, the first thing you should do is check your credit score … check out Credit Karma for a free report. It’s good to find out BEFORE you ask for a loan … this gives you time to work out any issues well before you plan to actually look for a home. A good local mortgage broker can run a credit check for you and most will gladly provide advise on how to improve your score.
Do you have enough saved for a down payment?
Depending on the type of loan, most lenders only require 3-5% of the purchase price for a down payment. So for a $150,000 home that works out to $4,500-$7,500. But there’s also something out there called private mortgage insurance (PMI). In just about all cases (except VA loan), unless you put at least 20% down you’ll have to pay PMI in addition. PMI can run between .5% and 1% of the value of the loan per year. In our example above, let’s say you put down 5% on the $150,000 home. Your down payment would be $7,500 and the amount of your loan would work out to be $142,500. The PMI could be between $59 and $118 PER month in addition to Principal, Interest, Taxes, and Insurance (PITI). And PMI stays on the loan until you have at least 20% equity in the home. That alone may cause someone on the fence to reconsider moving from renter to owner. In this state there is an organization called the Colorado Housing Finance Authority (CHFA). CHFA (pronounced cha-fu) exists to make home ownership more accessible to first time home buyers. There are a number of programs aimed at first-timers. The CHFA Advantage program, for example, requires only a 3% down payment AND no PMI. There are only a few pre-requisites for buyers participating in CHFA loan programs. See here for more details. A CHFA loan can certainly ease the financial burden of transitioning from renter to owner.
How much of your monthly income should you commit towards a loan payment?
Knowing how much you already pay for rent should give you a good idea of an amount that is comfortable. In general, lenders may authorize up to 43% of your gross monthly income towards debt servicing (total monthly debt payments including credit cards and auto loans). Depending on your income, that could be tough to manage. Most financial advisors recommend something closer to 25-30%.
Understanding the overall cost
Ok, so let’s assume that you qualify for a loan and have enough for a down payment. Let’s also assume that you’ve taken advantage of the CHFA program so PMI is not an issue. It’s important to understand how your mortgage payment will compare to your rent. As mentioned above, the total payment will include Principle, Interest, Taxes, and Insurance. Also known as PITI. The Taxes are payable to the county where the property is located, and Insurance is paid to cover your homeowner’s policy. The lender will collect the entire amount and pay the county and the insurance company on the due dates. That makes it a little easier for the homeowner, but also can cause buyers to underestimate their total payment when considering the purchase of a home. The table below shows the Principle and Interest portion of a mortgage at various amounts and interest rates.
Again, it’s important to remember that amounts in this table do not include the taxes and insurance portion of the total mortgage payment. These two items vary widely based on location. But for example purposes, let’s guess some ballpark figures for a $250,000 home are: Taxes: $1600/yr, Insurance $1200/yr. In this example the taxes and insurance would add another $233 to the monthly payment. Checking the chart above, 3% down on $250,000 would leave a loan amount of $242,500. Using the taxes and insurance numbers that we guessed on ($233), the total monthly payment would be approximately $1390. In Colorado Springs, that’s less than the rent for an equivalent property. So, in this case, going from renter to owner may work out pretty well.
How long do you plan to own?
I advise my clients that Real Estate is a great investment…but it’s a terrible short term investment. If you are not willing to hold on to a property for at least 5 years, you should probably continue as a renter. Some of us move around a lot, so it may not make sense to buy a home and then move to another city soon afterwards. Unless you are willing to rent the property while you are out of town. This is certainly not a bad option. Even after hiring a property manager (@10% of monthly rent), there’s a very good chance that the rent will cover a large portion if not all of your mortgage payment. Especially in Colorado Springs where rents are going up faster than home values. How long you intend on keeping the property is an important consideration when deciding to move from renter to owner.
Moving from renter to owner is a big decision. Talk to several local mortgage bankers. Pick their brains about your ability to make the transition. Check your credit score and be aware of the total cost of home ownership. And don’t forget to lean on the expertise of a great real estate agent to point you in the right direction.
Recommended: Guide To Buying a Home
About the author: The above article “Renter To Owner: Are You Ready To Make The Transition?” was provided by Kevin Guerrero of Keller Williams Clients’ Choice Realty. To find out more about Kevin and Keller Williams check out the ABOUT US page.
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