The big question.
While the market has been heating up and interest rates have remained low, many people are asking the question; “Am I ready to buy a house?” Buying a home is (obviously) a big decision in anyone’s life and certainly not to be taken lightly. The question is important not just for first time home buyers, but move-up buyers as well. Is now the right time? Have I prepared sufficiently? Is the home of my dreams out there waiting for me? Can we sell this house and buy a new one? So many questions. Hopefully, the following thoughts will help you prepare and decide whether you are ready to buy a house or not.
Ask yourself these questions.
Money, money, money. – The biggest questions, hands down, in determining if you are ready to buy a house are the questions of money. Buying a house takes money. There is no other way. Whether you pay cash or get a loan, you will still need money to buy a home, but there’s more to it than just what you spend at the closing table.
Down payment and closing costs are the big chunks of money you’re going to spend before you even get the keys to your new house. Whether you choose an FHA, VA, or conventional loan, you’re still going to need some cash. Even after you’ve considered the down payment, there are also closing costs. These range from the cost of getting the loan (lender’s fees) to the actual cost of the closing (title companies don’t work for free). Once a home is located and decided on, a much more detailed analysis of closing costs can be done and you can see the numbers and decide if you’re ready to buy this house.
Am I (credit) worthy? – Ahhh, the dreaded credit score. No one likes them. I’ve had people with excellent credit tell me their scores were terrible and I’ve had people with poor credit tell me their scores were amazing. There’s a lot of confusion surrounding credit scores. Your best bet? Sit down with a qualified, local lender (not an online source like LendingTree). They will review your basic finances, run a credit report, and if they can pre-approve you, they will give you a price range you can afford and estimates of what your monthly payment will be.
Many buyers I speak with are worried about visiting multiple lenders as they don’t want their credit score to go down (each credit inquiry in your file negatively impacts your score). In the case of home and car loans, as long as the queries are based in a short amount of time, you do not get penalized for multiple inquiries. You can review your credit report (but not your score) prior to visiting with a lender by visiting AnnualCreditReport. This site (unlike many others) is absolutely free. You can use it every year to keep track of what’s in your credit file. My suggestion is to take one report from one of the credit bureaus (Equifax, Experian, and TransUnion) once every four months. By rotating who you take the report from, you’ll be able to view your info three times each year. Knowing what’s in your credit report can help you know what needs fixed in advance.
Rent vs. buy. – One of the easiest things you can do if you’re renting and have begun to think about whether or not you’re ready to buy a house is to take a look at your current rent. First, when does your lease expire? If you just signed a new two year extension on your lease, you might want to stay put for awhile. A lease is a legal contract and breaking your lease often has negative monetary consequences. If you’re a few months away from the end of your lease, you might want to start thinking about it. The better you can time the switch, the less problem you will have when you tell our landlord you’re moving.
How much do you pay a month in rent? Do you scrape together each month’s rent by looking under the sofa cushions? Or do you pay it and still have money to save? If your budget is tight with your current rent, the goal of buying a house should be to pay less than you currently do. If the money is good and you’re actually able to save money each month, you might want to think of targeting that area as a monthly payment. Your lender will help you see the difference between rental and home ownership (there are advantages to owning a primary residence such as mortgage interest deductions).
Are you mentally (and financially) prepared for the challenge? – Ask any homeowner about their first home (or their current home) and they will tell you the same thing – “expect the unexpected.” This is why lenders push for “cash reserves” as part of their agreement to loan you the money to buy your house. Other homeowners will tell you of all the things they never thought of before buying a house. Although owning a home can be a lot of fun, it can also be frustrating at times – when your water heater blows in the middle of the night, when your sink or toilet backs up, when the appliances pass their useful life span and simply die on you – no matter what it is, there will be more costs associated with owning a home then you plan out. Being prepared is always a good thing.
“Now is a great time to buy.” – You’ve probably heard this phrase before. I think sometimes we as REALTORS® try to shove this down everyone’s throats, even though the true questions is “Is now a good time to buy for me?” Although there are many excellent factors affecting the potential for a buyer to purchase a home right now, the simple fact remains, that you have to be comfortable with the purchase. Buying a home that you can’t afford or doesn’t suit your needs solves nothing. It will only hurt in the long run if you buy when you’re not ready.
image courtesy of jamuraa