Having a house that you can call yours is a dream of many, and it is considered to be a huge part of building wealth in this country. Hey, it is after all the American dream, isn’t it? But, buying a house should be a step that you take only when you are truly financially ready. Otherwise, that step can turn into the worst nightmare. How and when do you know that you are ready to buy a property? Ask yourself these questions:
IS MY FINANCIAL SITUATION STABLE?
This is an essential question and the first one you should ask yourself. Be honest. Just because you really want a beautiful house that you drive by every day, it doesn’t mean you have means to do so.
What is your household income? If you are married, do both of you bring money in? If so, is that situation going to change any time soon? You might be planning on having kids, and one parent might decide to stay at home. Going from two incomes to one is a huge change in anyone’s budget, so be ready to plan accordingly. What kind of house could you afford? Do you have any savings that can help to bridge any hardship that life brings, like loss of a job?
Put these different scenarios on paper and run some numbers. It’s not a bad idea to plan to purchase a house on only one income. Just pretend that the other one doesn’t exist! That way you start with the smaller house/loan, with the possibility of paying it off faster and then moving into something bigger and better.
HOW IMPORTANT IS DOWNPAYMENT?
I am positive that you have encountered someone trying to sell you a course teaching you how to buy a property with no money down. Let me just say that should never be the case when you are buying a house for the first time in your life! Not only that you need the money, but the more you put upfront, the better.
Many banks will work with you even if you only have 5% to put for a down payment. That’s still not the reason to proceed with borrowing. Here is why is so important to put at least 20%.
Let’s say your dream house was listed for $100,000. (I know, the dream house would rather have one more zero 🙂 but hey, we are illustrating here!) You saved $20,000, thus you only borrow $80,000. Because you put 20% you eliminate PMI (Private Mortgage Insurance) payment. Since the big 2008 housing crash, banks have been really careful with how they operate the mortgage side of the business. They don’t want to lose any money, so if you don’t have enough to put forward, you end paying extra insurance, until you get 20% equity in your house. And let me tell ya, it will take years! Check this amortization site and see it for yourself.
Another big reason that should impact your decision when to buy is that you might get better interest rates with a bigger downpayment. Even though we live in times where interest rates are historically low, a small change of 0,25% makes a huge difference over the life of a loan.
DON’T FORGET OTHER COSTS
The price that is listed on Zillow or any other market place is not the only cost associated with the home purchase. People, being impatient to buy a house, sometimes overlook other expenses that add up quickly. Origination fee, home inspection, title, real estate agent fee. When you are calculating your monthly mortgage keep in mind that you will be paying property taxes, which in some states are very high. You also have to set money aside for any home projects, even if you don’t plan on doing them right away.
Think for a second, as a renter you are not responsible for property tax or maintenance. If something breaks in the middle of the night, you can call your landlord and it will be fixed. As a homeowner… Well, good luck if you don’t have the money or you are not a handyman.
HOW LONG ARE YOU GOING TO STAY IN THAT PLACE?
The USA is still one of the most mobile countries in the world. People move all the time for various reasons. Are you positive that you are going to stay in the current place for a while? The experts agree that it amounts to 5 to 7 years. How committed are you?
The reason why you should stay in one place for a few years is to be able to make some money if you decide to sell your house. When you buy you have to spend a lot of money at first, and as we said for the first few years you are paying a lot in interest, and very little goes towards the principal. If you sell to early, you might end up with no profit, even with the loss, especially if the house didn’t appreciate much in value.
CREDIT SCORE IMPACT
If you are not paying cash for your house, you are borrowing money from someone. Your lender will look at your finance before they give you any money. The first part of the story is the downpayment we discussed above. Another is your credit score. Again, the higher your score is, the better interest rate you will get.
Today, you can check your score almost anywhere for free. Any bank offers free credit monitoring, as well as specialized websites like credit.com and creditkarma.com. Many people that are actively searching for buying a house are simultaneously building the credit score.
SO, HOW DO I KNOW I AM READY?
In short, if you asked yourself all the questions above, you should have a clear picture of where you are on your journey or buying a house. Put everything on paper. If numbers don’t match, you are not ready. Give yourself additional time to work on things that are not up to par. If you don’t have enough money for a downpayment, maybe taking a side job will help you save for it faster. Also, don’t be afraid to talk to a professional, like a financial adviser and real estate agent, if things are not completely clear.
And, remember, when you are taking a loan always take less than what the bank offers! The margin of safety you will gain will help you sleep well at night, in your new (hopefully dream) house!