House hysteria is a real thing. Once one friend buys a place, the social pressure is on for others to follow suit. Everywhere you go, people are talking about Zillow, interest rates, great floorplans, school districts and desirable neighborhoods.
Before you’re green with envy and ready to sign on the dotted line, remember that buying a house is one of the biggest financial decisions you’ll make. Don’t let the pressure get to you, and don’t get down on yourself if you’re not ready. But if you’ve decided that home ownership is one of your goals, even if it’s a long term one, it’s time to start making a plan for that goal to become a reality.
Knowing whether or not you’re financially ready to buy a place can be tricky. Here are a few questions to ponder to find out if the time is right:
1. Is your financial house in order?
That’s finance lingo for, “Do you have your $#@! together?” Where do you stand with your credit cards? Do you have lingering credit card debt? Keep an eye on the amount of credit you use versus the amount of credit available. In general, folks who have the highest credit scores average seven percent credit utilization. We encourage people to keep the balance as close to zero as possible. The less debt you have hanging over your head, the better off you’ll be.
In addition, take a look at how you manage your auto, student and personal loans. Are you making regular payments on time and chiseling away at your debt? All of this will greatly impact your credit score – which then impacts your mortgage interest rate. You can downplay any financial problems you have to yourself and to others, but the bank will find out where you really stand. It can be a rude awakening if you don’t work to improve your credit profile ahead of time.
2. Have you saved enough for a down payment?
A down payment is the one-time cash payment you provide at closing. The amount you put down will directly influence your monthly mortgage (bigger down payment = more equity = less of a loan = lower monthly payment).
We tell our clients and friends that putting at least 20% down is ideal. This will help you avoid PMI (private mortgage insurance), which can add a significant amount to your monthly payments.
We realize putting 20% down is a tall order. Don’t get discouraged if you haven’t saved nearly enough yet. That is where financial planning comes in. With a financial plan, you can figure out how much you will be able put aside in savings each month. You just have to be patient and diligent to make it happen.
3. Have you considered the other costs associated with buying a property?
We promise – we don’t want to be the bearers of bad news. We just want to prepare you for what’s ahead. Along with your down payment savings, it’s wise to also have a stash to cover closing costs (ranging from 2% to 5% of the purchase price). Some sellers will agree to cover a portion (or all) of the closing costs during the negotiation period. There are lots of variables that impact where or not sellers will cover those costs: the demand on homes in your area, the home inspection outcome, the negotiated cost of the property, etc.
Don’t forget about the money that you’ll inevitably spend to make your new house feel like home. Perhaps it’s paying for new furniture, updating the kitchen, putting on a fresh coat of paint or adding lush landscaping. Whatever those home improvements may be, you want to be realistic about the costs, and plan for those expenses ahead of time.
4. Are you ready to settle down?
No, we don’t mean you need to get married, have a few kids and get a dog the moment you close on a home. But you should be committed to staying in your new place for at least five to seven years in order to recoup the closing costs and transaction fees you forked over at closing. Plus, depending upon the economy, a home needs time to build equity.
It’s in a homeowner’s best interest to have a steady income and reliable profession. Perhaps you’re not there yet, and that’s ok. Just remember that no matter what, a mortgage payment is due every month, so you need to ensure you’ll be able to cover it.
If you answered ‘yes’ to these questions, then it sounds like purchasing your first home may be the right move for you. If you’re ready to take on the biggest purchase of your life and take on all that goes with it, we say go for it. Just make sure you have a financial plan in place that will keep you enjoying your life, and your new home.
If you have any questions, don’t hesitate reach out to us. Best of luck – we’re rooting for you!
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