The winter housing market is in full swing. People measuring the size of entryways, deciding whether two people can adequately cook in the kitchen, and determining where to put the holiday decorations are among the many conversations you will hear at a popular open house.
Maybe you have been thinking about buying a house for some time now or perhaps it is a new idea, but either way, it is important to carefully consider your options before investing in such a large purchase.
Today, we have put together 5 questions to help you think through the many intricacies of the home buying process and if it is a good move for you.
1. Do you have sufficient savings?
It’s no secret that buying a house is a big investment, so you will need to have a decent chunk of change to be able to even start the conversation about buying a home.
Perhaps the most obvious cost is the down payment. Most lenders will require a 5%- 10% down payment, with some requiring 15%-20% for the best interest rates. The more money you are able to put down, the better interest rates you will get, generally speaking. There are some first-time home buying programs where lenders will accept as low as 3% or even 0% down. Keep in mind that any down payment under 20% will require Private Mortgage Insurance (PMI), which can add anywhere from 0.5% to 1% of the entire loan. It is best to avoid PMI whenever possible. Down payments have nearly always been required by lenders in case the borrower stops paying on the loan for any reason, the lender can resell the house for enough to pay off the loan.
But a down payment is only one financial factor to consider. You will also need to have enough cash to cover closing costs, which can come to 2% to 5% of the entire loan depending on the lender. Closing costs - the industry term for the incidental expenses associated with making or “closing” the loan - cover a variety of things including the appraisal required by the lender (to make sure the house appears to have a value near its price based on recent comparable house sales elsewhere in the neighborhood), the inspection (to make sure no major repairs are needed, like a new roof), legal fees to the insurance, etc. If the total cost of your purchase was $250,000, for example, you could be paying anywhere from $5,000 to $13,000 in closing costs alone.After you have secured the cash to purchase the home, the financial requirements don’t end there. You will need to make sure that you can meet the monthly mortgage payments, PMI if you needed it, home insurance, property taxes, and utilities.
It is also important that you have an emergency fund for home repairs and routine maintenance costs. Inevitably you will experience some damage with the house that you will need to fix and if you spend all of your cash on the down payment and closing costs, you could find yourself in a tough spot. You should also anticipate doing a lot of physical labor yourself because houses typically require ongoing minor maintenance, just as a car does. The term “sweat equity” means how much value you have added to your house by your own labor!
Make sure you take some time to evaluate your financial situation. Even if you can afford a home, is it something you want to spend the money on? Do you know how to take care of a house physically? Does it make sense from both a short-term and long-term financial perspective?
2. Have you paid off your debt?
Taking on a mortgage is a big debt load on your shoulders, which is why it is important to be free and clear of any other debt in your life, both for your sanity and to qualify for a loan in the first place. Lenders will look at your debt to income ratio and use that as a basis for granting the loan. 43% is the standard that the Federal Housing Administration uses for the loan process.
This means all your regular debt payments - student debt, car payments, credit card payments, etc. - plus your housing-related expenses—mortgage, mortgage insurance, homeowner's association fees, property tax, homeowner's insurance, etc.—shouldn't equal more than 43% of your monthly gross income.
Ever since the financial crisis in 2008, most lenders adhere to this ratio with rare exceptions. Therefore, any non-mortgage fixed payments can hurt your monthly budget, especially when you have a mortgage on top of it. An increased debt load can also impact your credit score, a number crucial to your eligibility for a loan and a good interest rate.
3. Is your job secure?
While the job market always fluctuates, it is important to look at the overall stability and security of your field. Are you in a volatile field that can shift at any time or are you in a more stable sector? It is important to know that you will be able to pay your mortgage each month and job security can indicate the likelihood of that happening.
Lenders will even look at your work history before giving you a loan. Most like to see at least 2 years of work history at the same company to show stability. It is also good to think about if you like your job and would be happy staying there. If you aren’t, are there other companies or opportunities nearby in your area? Answering these questions will help you decide if staying in one place makes sense for you, your family, and your lifestyle.
4. Are you ready to stick around?
Before buying a house, make sure that you are happy in the city/town where the house is located. Can you see yourself living there permanently or are you excited to start your next adventure in a new place?When you own a house, many people advise staying for at least 5 years, preferably 7 to 10, to make the investment worthwhile. If you haven’t thought about your long-term plan or you don’t see yourself staying where you are, renting may still be the right option for you for now.
5. How will it impact your lifestyle?
Your lifestyle is one of the most important parts of your life. Think about the way that homeownership would impact your current lifestyle. What things would have to change? Would you need to give up any expensive hobbies that you enjoy? Are you excited about making a place your own and settling down for years to come? Most psychologists and sociologists say remaining in the same house (or at least in the same town) is good for families - children tend to thrive on stability.
You don’t want homeownership to completely derail your life, you want it to enhance it. Take some time to think about how owning a house will change your current lifestyle and if it would be for the better or not.
Owning a home is a wonderful goal. It can give you the freedom to make something all your own, put down roots, and make a strong investment. But homeownership isn’t for everyone and doesn’t have to look the same for every person. Evaluate your financial and personal wellbeing before you decide to purchase a home.
Are you wondering if homeownership is a good addition to your financial goals? Schedule a call with us. We would love to help you solidify your financial plan.