1: Is Your Financial House In Order?
How much credit card debt do you have?
How about auto loans, student loans, or personal loans?
No, you don’t need to tell me. You can lie to me and to others all you want, but you cannot lie to yourself (or the bank) if you want to buy a home. I’m not saying that you can not have any debt in order to buy a home, but I believe debt is the symptom of a greater sickness. “But Brandon,” you say “I only have that debt because of (insert financial difficulty here).”
That debt is a symptom of a greater problem: not enough money. If you are force to use a credit card because there seems to always be more month than money, do not buy a house.
How about your credit? Are you rocking a 820 credit score or scraping by with a 620? Your credit score is the number a bank uses to determine how well you handle credit. If your credit score is terrible, it’s probably because you handle credit terribly. Yes, there are circumstances beyond your control that could affect your credit score (such as fraud or medical bills) but even so these issues need to be cleaned up before you begin shopping for a home.
2: Have You Saved Enough For A Down Payment?
Your down payment on your first home will most likely be the single largest investment you’ve ever made. I’m not just talking about the down payment you’ll need to finance the home, but also all the unforeseen costs that are associated with your acquisition.
As you probably know, today you can buy a home for as little as 3.5 percent down payment. On a $200,000 home that’s just $7,000. Many people look at that and say, “Well great! I happen to have saved just that much money!”
But don’t forget the closing costs, insurance, taxes, and money for repairs and furnishings to turn the house to a livable home. These costs will easily add thousands of dollars to your bottom line.
There’s not much worse than buying your dream home and not having a cent to fix it up to fulfill your dream. You may be stuck with plain white walls or an olive green bath tub for longer than you want. If, however, you can afford a down payment that allows room for breathing (and upgrades) after the purchase, you are on the right track to home ownership.
3: Can You Really Afford The Payment?
When it comes to your monthly mortgage payment, can you really own for the same amount as you can rent?
Most real estate agents will enthusiastically tell you”yes!”
In truth, the amount you pay in rent probably would be similar to the amount you would pay in principle and interest on your mortgage loan. However, your principle and interest are not the only costs associated with owning. Don’t forget about:
HOA (homeowner’s association) fees
Water, sewer and/or garbage
Other utilities your landlord may cover
These charges will add hundreds to your monthly payment. On one of my duplexes, my tax and insurance payment is more than double the mortgage principle and interest!
Be cautious about simply using an online mortgage calculator to decide how much it would cost to own a home. The mortgage payment alone is only one piece of the puzzle. You must determine a reasonable amount that you can afford before you shop for your home.
Only you know your personal budget and what you can afford, but I recommend never taking a monthly payment that is more than 25 percent of your take-home pay…and that includes your taxes and insurance. Most lenders will allow you to stretch yourself significantly thinner than that, but don’t fall for their temptation. The worst financial crisis to hit our economy since the great depression was triggered by these same loose lending criteria.
4: Are You Ready To Settle Down?
How many job changes have you had in your life? If you are like me, probably several. Until you find that one career you plan on keeping for a while you may find that your next job may create a two hour commute or, worse, lead you to another city or state.
Unless you are in the flipping business, your home is a long term investment. Home prices, on average, appreciate around three percent per year. In other words, if you buy a home and sell it within a year or two, there’s a chance that the increased value (if any) won’t even cover the closing costs you paid to buy the house. K
I recommend planning on staying in your home for at least five years. If you aren’t ready to commit to that length of time yet, it’s okay. Just don’t jump on the “I need to buy a house because everyone else is” bandwagon.
Yes, you can always rent your home out if you were to move out of the area. In fact, I’m a believer in turning prior homes into rentals; it’s how I got started investing in real estate. It takes work to be a landlord, however, and you should know what you’re getting into before diving into real estate investing.
5: Can You Fix a Leak?
When you become a home owner, you have to be able to fix your own problems. It’s perhaps the biggest difference from being a renter.
You can’t simply call the apartment office or landlord to have them fix a leaky sink or broken dishwasher. When you are the owner, you need to have either:
the ability to fix problems yourself or
the resources to pay others to fix them.
If you can fix things yourself, you can save on the labor but the material costs can still wreck havoc on your savings. A new dishwasher isn’t cheap. These little surprises are a part of home ownership, and you should be prepared for them both financially and psychologically.
So, Are You Ready To Buy?
Did you answer “yes” to each of these five questions?
Are your debts and credit score in order?
Have you saved a down payment and money for furnishings, moving, and upgrades?
Can you comfortably afford your new monthly payment?
Are you ready to settle down?
Can you fix a leak?
If so, I fully encourage you to pursue buying a home if you desire to. Although this article may come across a bit against home ownership, I am a full believer of buying a home (and more than one) as soon as you are ready. Buying a home can be a terrific investment, especially if you buy when prices are “on sale” like they are in today’s market. Of course, no investment is guaranteed.
If you were not able to answer yes to these five questions – that’s okay! Owning a home is like having children: they may be blessings, but that doesn’t mean you need to rush into it (both homes and kids can get expensive!)
Buying a home is a big decision. As I mentioned earlier, buying a home is not so much about “when” as it is “who.” Only you know truly who you are, what you can afford and what you can’t.
Keller Williams Southern Arizona