Are you ready to be a homeowner?

If you're thinking about buying a home, you probably have a mental list of the benefits owning a home would bring to your life. You imagine waking up and falling asleep in your own home, decorating as you please, or maybe even getting away from the loud neighbor you hear every evening through the paper thin walls of your apartment complex. You are ready to invest your monthly housing expense, instead of giving it all to your landlord every month.

The desire to own a home has been felt by nearly all Americans. Owning a home is the American dream. So what's stopping you? That's a good question, one that should be carefully answered. It's important that before you buy a home, you understand the potential impact it will have on your finances and lifestyle.

Listed below are some of the new responsibilities and added benefits of owning your own home.

New Responsibilities:

Maintenance - If you've never owned a home before, you are probably used to calling your landlord when an appliance breaks down, or something else goes wrong. When you own your home, you become the landlord. When the dishwasher stops working, you get to call the repairman and pay for the repairs. Be prepared to spend more time and money on emergency and planned repairs on your home.

Disposable Income - When you buy a home, you can either pay cash or get a mortgage. Most people have some kind of mortgage on the home they own. To get a mortgage, you will need a down payment. Saving for a down payment will take discipline on your part, and possibly some time. And this is required before you even move into the home! Once you move in, you will need to continue setting aside money for repairs, improvements, new appliances, etc.

Monthly Cost - In some cases, your mortgage payment will be more than your current rental payment. This is especially true if interest rates happen to be high when you purchase your home, or if you buy a proportionately larger home than you are renting. Mortgage payments are typically higher than rent because besides paying the principal and interest on your mortgage, you must pay for hazard insurance, property taxes, and any mortgage insurance that might be required.

Risk - Any investment you make has some element of risk. Luckily, purchasing a home is on the low end of the risk spectrum. Since no investment is totally safe, you will want to do sufficient research before you buy the home, and continue staying atop of current trends in your city and neighborhood to verify your investment is doing well. Insurance and proper maintenance are other ways to protect your investment.

Liquidity - Buying a home should be considered a long-term investment. If you plan on moving frequently, you might not recoup closing costs and fees paid when you get a mortgage, or the fees paid to a Realtor when you sell the home. And unlike a mutual fund or stock, you must sell your home to turn your equity into cash. Selling your home might take months and relocating to a new residence takes energy. These are hindrances to accessing the money you invested and why equity in a home is considered a non-liquid asset.

Benefits:

Pride of Ownership - It is a great feeling to own your own home. This benefit may be enough to outweigh any disadvantage previously listed. With your own home, you feel a sense of stability and community that you probably didn't feel when you rented. This comes from the fact that you own a piece of property in a neighborhood along with others enjoying the same benefits as you.

Investment - Since you are going to have a housing expense for most of your life, it is definitely worthwhile to consider investing some of that expense in a home of your own. For those people who plan on staying in a home long enough to pay off their mortgage, owning a home is a forced savings plan.

Appreciation - If your house increases in value (becomes worth more than you paid for it) you will benefit from this appreciation. As you continue to pay your mortgage, and your home appreciates, your equity grows. When you sell your home, this equity will become dollars in your bank account. It is important to carefully choose your home so that over time you will benefit from appreciation, because it is not necessarily guaranteed.

Tax Savings - Consult your tax advisor for the specifics of any tax savings you might benefit from with owning you own home. Usually, some expenses may be tax deductible such as mortgage interest and property taxes.

If you are ready to take advantage of the benefits of owning a home and feel you can handle the new responsibilities it will bring, you will want to take the next step and determine if you are prepared to qualify for a mortgage.

Are you qualified to buy a home?

To qualify for a mortgage, you will need to prove to a lender that you have sufficient income, credit, and down payment for the home you are trying to buy. In general terms, you can expect the following requirements by the lender.

Income:

One aspect of qualifying for a mortgage is often referred to as your "ability to repay." This means that you can provide evidence that you receive a certain amount of income sufficient to pay your current liabilities along with the new mortgage payment. Two qualifying ratios based on your gross monthly income (income before taxes or deductions) determine the loan amount for which you qualify. These ratios vary depending on your lender and on each individual's situation, but there are some basic qualifying ratios that you can use to determine if you qualify for a certain loan amount.

Generally, for a conventional mortgage, your housing expense, which includes your principal, interest, taxes, and insurance, should not exceed 28% of your gross monthly income. Your total monthly expenses, which include your housing expense and any long-term debt, like car payments, should not exceed 36% of your gross monthly income. FHA and VA mortgages have different qualifying ratios. See chart below.

For example, if your gross annual income is $50,000, or $4167 per month, your monthly mortgage payment should not exceed 28% of that number, or $1167. In other words, you would qualify for a conventional mortgage that requires monthly payments of $1167. But you have to qualify with all monthly long-term debt also. If your gross monthly income is $4167, 36% of that number is $1500. So your total long-term debt along with your mortgage payment cannot exceed $1500 per month.

You can call a mortgage lender/broker and speak with a loan representative who can calculate these ratios for you and provide a loan amount for which you qualify. The lender/broker will require documentation of the monthly income you receive. If you are a regular employee, 30 days of paystubs and W2s will be required. If you are self-employed, two years' most recent tax returns along with a profit and loss statement will be needed.

Credit:

Another aspect used to determine if you qualify for a mortgage is referred to as your "willingness to repay." This takes into consideration your past and present credit history. Your credit history will demonstrate to a mortgage lender if you are willing to pay your debts in a satisfactory manner.

Your credit history includes items that may or may not appear on your credit report. Liabilities like car loans, credit card debts, and any personal loans will most likely appear on your credit report. If any of your liabilities at the time of applying to a mortgage lender do not show up on your credit report, you will be required to provide evidence of your repayment history with those accounts. An item that most likely will not appear on your credit report is your rental history. This will have to be verified independently either through a letter from your landlord or copies of your rent checks that have cleared your bank account.

If you feel like you pay all of your creditors as agreed, you probably have excellent credit. If your credit report confirms that you do pay on time and in full, you should have no difficulty in obtaining a mortgage. Do keep in mind that you never want to have too much outstanding debt so that you qualify from an income position.

If you do not have much of a credit history, for whatever reason, you can still obtain a mortgage loan. For instance, when you pay your monthly phone or public service bill(s), these companies do not report your payments to a credit reporting agency. However, these are sources of credit you may have obtained. Your lender/broker will need verification of payments to these non-traditional credit references. Ask your lender/broker for details regarding these types of credit references.

Some potential homebuyers might have less than perfect credit histories. If you feel like you fall into this category, discuss your particular situation with a lender/broker. Many programs exist for different types of borrowers. Your dream of homeownership might still be within reach.

Down Payment:

In the past, if you did not have at least 20% of a home's purchase price as a down payment, you could not qualify for a mortgage. Unfortunately, that kept many people from buying a home. That is not the case today. As a result of government programs, private lenders, and mortgage insurance you can buy a home with as little as 3% down. And in some situations, mortgage companies are beginning to offer programs requiring no money down.

Mortgage insurance companies play a major role in helping a homeowner with less than 20% down obtain a mortgage and purchase a home. Basically, a mortgage insurance company insures the lender for the difference between what a borrower puts down (as little as 3%) and the 20% down the lender would normally require as down payment. Any mortgage amount you borrow that is more than 80% of the home's purchase price will require mortgage insurance. With conventional financing, you will pay the mortgage insurance with your monthly mortgage payment. FHA requires a monthly mortgage insurance payment along with an up front insurance premium that is financed in your loan amount. VA requires an up front premium that can be financed into your loan amount.

Regarding your actual down payment, however much it is, your lender/broker will have a few requirements. The most common requirement is that the money you set aside for your down payment can be verified as yours. Some mortgage programs may allow for your down payment to come from other sources, however, it is more likely you will have to prove that your funds for your down payment are your own. Another requirement concerns the liquidity of your funds. A cash balance in your local bank account is considered to be the most liquid. Stocks, bonds, or any other assets (including property) are not considered liquid, but if sold and documented to have been your own, are perfectly acceptable.

Homeownership is at an all time high because of low down payment options. With a low down payment, many first-time homebuyers are now able to experience the benefits of homeownership sooner than ever before.

Remember that the guidelines outlined above are general in nature and your lender/broker can provide any specific requirements for your situation.

What's next?

You've weighed the benefits versus the new responsibilities of owning your own home, and you think you qualify for a mortgage. So what's next?

Find a Lender/Broker

The first thing you will want to do is find a qualified mortgage lender/broker to verify that you do qualify for a mortgage loan. This can be done before you even start shopping for a home and most Realtors will recommend you get pre-approved for a mortgage also.

Find a Realtor

The second thing you should do is find a qualified Realtor. Although you may think you can find a home by yourself, by looking in the paper or driving through neighborhoods, a Realtor is an invaluable assistant. Not only will he or she be able to direct you to your dream home, a Realtor assists with the negotiating and entire home buying process. As a buyer, a Realtor will provide most of these services to you free of charge. Be sure to find out if the Realtor you choose will be working for you as a buyer's agent, or for the seller as a seller's agent. It is usually desirable to find a Realtor that will be your agent so that you will be satisfactorily represented throughout the process.

Don't make any major changes

Do not make any major financial changes in the weeks or months leading up to buying your home. Any new debt could change the loan amount of the mortgage for which you qualify. A change in jobs, especially from regular employee to self-employed, could change the type of loan for which you qualify. Discuss any changes you must make with your lender/broker first. He or she may be able to advise you on the proper steps to take so that you can still become a homeowner.

Have patience

Finding a home should not be taken lightly. You will want to take your time and research the home you finally purchase. If you are living in a tight home market, where there are more buyers than sellers, you may need to make your offer on a particular home quickly, but that does not negate the fact that you should do your research. Plan on treating your home search as a part-time job. In the end, you will find that all of your hard work resulted in the benefits of homeownership.

Good Luck!