Learn What You Should Do When Buying a Home
Buying a home is a big deal.
Too often, I think people rush into home ownership because it’s seen as a sign of adulthood and financial responsibility.
But owning a home is a big commitment, it’s not a guaranteed good investment, and it’s a truckload of work.
And last but not least, believe me, lots of people own homes and yet their finances are a mess! Home ownership can be a smart long-term move, but you want to know what you’re getting into.
With that said, I know that if you’re reading this, you’re probably going to buy a house anyway. That’s fine; we all did too. So here we've put together a first time home buying guide to wrap up our best advice over the last few years in once place. Enjoy!
Can I afford it?
Buying a house will have a significant impact on your finances, so make sure you can handle it.
Housing is more affordable than ever and incentives like low interest rates and the new expanded tax credit are enticing buyers to enter the market. But purchasing property involves a lot of upfront costs: closing costs, down payment, new furniture, moving expenses. Do you have enough cash?
Create a budget for the monthly mortgage payment and homeownership costs, such as general maintenance if you buy a single-family home or homeowners association fees if you buy a condo.
Am I mortgage-worthy?
Say you saved enough cash, but what about your credit? It’s not a secret that getting a mortgage these days is harder than it used to be. Lenders are looking closely at all documentation of your income, debts, assets and liabilities, to make sure you don’t exceed the maximum debt-to-income ratio. And when it comes to credit scores, the most competitive interest rates (the 5 percent you may have heard about) only go to buyers with credit scores above 700.
The key is to review your financial situation before you check out open houses. Use our affordability calculator to see what kind of monthly mortgage payment you can comfortably afford.
Do I plan to live here for at least five years?
Most personal finance experts say that unless you plan to live in a home for at least five years, you likely won’t recoup any of the expenses associated with buying and later selling the house.
Plus, your first few years of mortgage payments primarily pay off interest, not your principal, so you will not have built up a lot of equity in your home. You may be better off renting if you expect to move in the next couple of years. Just because you live in a buyer’s market doesn’t mean the time is right for you to buy.
If I buy with another person, how will this affect me?
Buying real estate with another person has its perks, if you both have stable financial situations. By combining cash and resources, you're likely to get a bigger, better place than you each would as individual buyers. Plus, when you're starting out, it helps to share the financial burden with someone else.
But before you start house hunting together, sit down, lay all your cards on the table and get the answers to these important questions. Whether you're buying with a spouse, domestic partner, relative or friend, setting the ground rules first will save you both a lot of headaches in the future.
Is it worth the money?
The place in which you live is an investment and the money will always be relevant, but that old-fashioned moniker “home sweet home” is decidedly modern these days. People aren’t buying houses anymore; they’re buying homes.
Do I have enough cash?
Buying property requires a large amount of cash upfront to cover closing costs and a down payment, which ranges from 3 percent for a government loan from the Federal Housing Administration to 20 percent for a conventional loan. That’s a lot of cash to fork up. Can you handle it? Will you have enough cash on reserve for emergencies, like an accident or job loss?
How much will I spend on a monthly basis?
Your monthly payment will consist of PITI: principal and interest (determined by the home’s purchase price and your interest rate), property taxes and home insurance. Your monthly homeownership budget should also include utilities, cable/TV/Internet and general maintenance costs.
When buying a condo or townhome, factor in the homeowners association fees and any special assessments.
Will buying a fixer-upper save me money?
If you’re young and driven, you may not mind if your house is a fixer-upper. And if credit is an issue, that may be about all you can afford. But keep in mind that repairs and home improvements still require money, so prioritize your projects and create a budget.
The right house for you
The house you buy should at least fit into your five-year vision for yourself. Why spend the time and money on something you’ll outgrow in a couple years?
So look for a house that doesn’t just fit this stage of your life, but would also work for the next one. A mistake that many first-time home buyers made in previous years was looking at their house mostly as an investment and not a place to live and grow old. It was all too easy to say, “Well, if this small yard drives us crazy, we’ll get a bigger one at the next house.”
And it may, indeed, turn out to be easy -- the housing slump won’t last forever -- or it may be harder than you think. You don’t want to box yourself in and limit yourself before you even move in.
It all seems like common sense, but people who are used to apartment living and changing houses like outfits will find themselves in a bind when they finally buy, because the house no longer fits their needs a year later.
