Before buying a home for the first time, you need to make sure you’re financially and personally prepared for the home buying process. To make this decision, ask yourself these 10 questions.
1. Do you plan to remain in your home for at least five years?
There are many costs associated with buying and selling a home. Because of that, most experts agree it isn’t a good idea to buy unless you plan to remain in the home for at least five years. Over that period of time, the home will hopefully appreciate enough in value that you can recoup the expenses associated with its purchase and sale.
2. Will you qualify for a loan based on your financial credentials?
As mentioned above, lenders consider your credit score, debt relative to income, and employment history when determining if you are eligible for a loan. If you don’t qualify for a mortgage, or if you qualify only for an expensive loan, you may want to wait until you’re in a better financial position before becoming a first time home buyer.
3. How much money do you have for a down payment?
You can qualify for some types of home mortgages with as little as 3% down or with no down payment at all. But this is usually not a good idea. There are added costs associated with taking out a mortgage loan that doesn’t require a down payment, even with government-guaranteed mortgages such as FHA or VA loans. And, not having a down payment puts you at risk of owing more than your home is worth.
If you borrow enough to cover almost the entire price of the home, when you want to sell, it could be difficult to get enough money to pay off your full mortgage — especially after accounting for real estate agent expenses and other closing costs. This could trap you in your home even if you need to move because your financial or job situation changes.
A large down payment protects you from ending up underwater, which is what it’s called when your mortgage is more than the value of your house. You ideally want a large enough down payment that your home is still worth more than you owe on it, even if the real estate market declines.
If you can save a 20% down payment, you’ll be in a good position since you likely won’t end up underwater and you can also avoid paying for private mortgage insurance or other fees.
4. How stable is your job?
Lenders want to see stable employment history, but it’s also a good idea for you personally to make sure your income is reliable. You don’t want to buy a home and become unable to make payments because you lost your job.
5. How is the real estate market in your area?
It can be difficult to predict what will happen with the real estate market. Still, you can look at factors such as how long homes are on the market and whether they’re selling at asking price, or above it or below it, to assess whether it’s a buyer’s or seller’s market. If it’s the right time to buy for you and you plan to stay put for a long time, it may not matter much. But ideally, you want to try to avoid buying when home prices are at their peak.
6. Can you afford a home in your area?
Most experts recommend you keep your housing costs below 30% of your income. If homes are very expensive in your area, it may not be feasible to buy without borrowing too much and becoming house poor. If you tie up too much of your money in your home, it could be difficult for you to save for retirement or accomplish other financial goals.
One way to save money on a home is to buy a starter home. These are generally smaller, less expensive homes. You may be able to afford the mortgage on a starter home, then purchase a larger home when your income is higher.
7. What mortgage terms can you qualify for?
For most Americans, their mortgage is the largest debt they take on. Qualifying for favorable mortgage rates is important to avoid paying more than necessary.
When you borrow so much and pay it off over such a long time, even a small difference in interest rates can make a big impact. A $300,000 loan at 3.25% would come at a total cost of $470,023 with monthly payments of $1,306 over 30 years while the same loan at 3.75% would cost $500,165 with monthly payments of $1,389.
8. Do you have enough money for closing costs?
Closing costs are an inescapable expense when buying a home and they can total around 2% to 5% of the purchase price. Make sure you’re prepared for all expenses of owning a home, including:
While some lenders allow you to borrow to cover some of these closing costs, if you do, you’d be paying interest on them over many years. It’s often best to pay up front if you can afford to do so.
9. Do you have an emergency fund?
Many experts recommend setting aside 1% of your home’s value every year to cover repair costs. Others suggest budgeting $1 per square foot for maintenance and repair.
Whatever metric you choose, you need to be prepared to pay when things break. You also want to be sure you don’t miss a mortgage payment due to a drop in income or an increase in your expenses.
An emergency fund helps you be ready for the responsibility of homeownership. Ideally, this fund will cover three to six months of living expenses (including your new mortgage payment). That will help to ensure you’re able to cover costs that arise after you’ve purchased your home.
10. Do you have money for moving expenses?
Moving can be very expensive, especially if you’re making a long-distance move. Make sure you’ve got money to cover the cost of getting your possessions into your new home.
View more information: https://www.fool.com/the-ascent/mortgages/first-time-home-buyers-guide/