Sure, all your friends are doing it. Geez, even your parents did it! Why can’t you? You watch HGTV. You’ve browsed Zillow.com. It’s easy. You’re ready. Let’s do this! Let’s buy a house!
Not so fast, professor.
Just because you THINK you can doesn’t mean you should. Buying your first home can be an exciting time, and it’s likely the biggest purchase you’ll ever make. Don’t jump into it without being ready and doing your homework. So, you want to buy a house? What’s the FIRST thing you should do before you even start looking? Let’s examine the important topics and questions you should ask yourself to find out if you’re ready to take the plunge into home ownership.
Examine your money situation. The single most important factor with home ownership is your budget. Having a household budget is your top priority. You need to know where you are financially to know exactly how much you can afford to spend on a new home. It’s important to have ALL your financial ducks in a row. Lenders look at your debt-to-income ratio. Generally, they want to make sure your monthly housing costs — including principal, interest, taxes, and insurance — will consume no more than one-third of your monthly gross income.
When you’re applying for a mortgage, what do lenders care about most?
• Down payment
• Credit score
Income. Is Your Job Secure? Financial stability is one of the biggest motivating factors when it comes to purchasing your first home. If you’ve had a stable income for two or more years, have achieved success in your career and expect more growth in your future, purchasing a home is also a wise decision.
Evaluating how long you plan to live in the house to make it financially worthwhile is wise. In overheated markets, you may have been able to flip a house for profit in less time. But with the upfront costs you’ll have to pay to buy a home, it’s smarter to put stick to the 5-to-7-year rule of thumb, especially in uncertain times. Consider any imminent life changes — such as switching careers, going back to school, or getting married — that could throw a wrench into your plan.
Does your current city feel like home? Ask yourself if you love your hometown and have no desire to live anywhere else. If you’re uncertain whether you’ll be in the same city for more than a year or two it might not be in your best interest to buy something in that market. However, if you love your city, purchasing a home there is a great idea!
Down Payment. Do you have enough money for a down payment? What is generally considered a reasonable monthly payment for a house? Your housing costs shouldn’t eat up too large of a slice of your income.
The 20%-down-payment rule of thumb is outdated. Putting that much down is excessive and unnecessary. A 10% down payment is the minimum smart buyers should aim for, but 20% is even better — and not at all excessive. That will save you the $50 to $100 per month you would otherwise pay for private mortgage insurance. It’ll also help you get a lower interest rate on your mortgage. Plus, in a slow housing market, putting down 20% will give you some equity in case you have to move sooner than expected. That equity also serves as an extra cushion of cash in an emergency.
What about closing costs? You’ll need to budget an extra 3% to 6% of the purchase price to cover costs at settlement. We all like to get paid for our work. Real estate professionals are no different. The professionals who are involved with the home purchase transaction need to be paid. These usually include the loan origination fee, any loan discounts or “points,” title insurance, attorney’s fees, property taxes as well as survey, state recording and transfer taxes, and other costs.
Credit Score. Do you know your credit score? What’s the minimum FICO credit score you need to get the best rate on a mortgage? You should be able to snag the best rates with a score of 760 or higher. Making sure your score is in good shape will not only help you get a loan, but also it could save you a lot of money. There are specific things you can do right now to affect your score in a positive way. Talk to your lender or give me a call. I’d be glad to guide you.
Home Improvement Projects. Ahh, yes! A place of your own. Home ownership will make your life so much easier. Owning a home takes a lot of time and energy. If something breaks, you must fix it, or pay someone else to fix it. You’re also responsible for upkeep, including yard work and shoveling snow (unless, of course, you buy a condominium without a yard). Will you have emergency cash if something goes wrong? You’ll need that cushion available for home-related emergencies, such as hiring the occasional plumber.
Do you get excited at the prospect of home improvement projects? One of the best parts about being a homeowner is getting to take the blank canvas of an empty house and make it your home. If you have an abundance of ideas for your future space and the energy to bring them to fruition, then you should get excited about the opportunity to own your first home. After all, home improvement only exists when you have a home of your own!
Rent vs. Purchase. Are you tired of renting? Most people start renting because they don’t have any savings, don’t have a steady job, don’t know how long they’ll be in a city, or don’t know which area they want to live in. For whatever reason they haven’t had their “moment” yet, time goes on, months to turn to years and life just gets too busy to worry about purchasing a home. If you looked back and calculated the amount of rent you had spent and put it into a mortgage calculator you would soon realize you could be sitting on thousands of dollars in equity in a home instead of just handing money over to the landlord. Living under rental conditions can be exhausting and expensive or liberating and time-freeing. Which is it for you?
Even if you can afford a house, don’t buy simply because you can. You’ve got to be prepared to live the lifestyle. Talk to friends and family about your options. Get advice from professionals. Connect with me. I am happy to help you examine your situation to see if home ownership is a wise decision for you.