Home Ownership: To Buy or Not to Buy
The months of April through July generally account for more than 40% of a year’s housing transactions. Buying a house is easily one of the largest financial decisions of your life. So, how do you know when you’re ready to buy a home? If you are looking to take the plunge during this year’s hot buying season, give yourself the best chance by coming to the table well-prepared.
Am I ready to buy?
Homeownership is a bucket list item for many people. However, it's not a necessity. If you’re considering buying a home, make sure you can say ‘yes’ to the following four questions:
- Do you have a 1-month emergency fund and little-to-no bad debt?
- In addition to the above, do you have enough cash to put 10% down, without pulling from your 401(k)?
- Can you buy in a good, stable location? Areas with great elementary schools tend to hold their value.
- Are you planning on staying in the house for at least five years?
Despite all the good that comes with owning a house, such as equity and tax benefits, if you can't say yes to these questions, it may be a better deal financially to rent.
How will I afford my home?
Before you even start looking at homes, you’ll want to know your budget. Set your upper price limit at less than 3x your combined gross income. If you can get to 2.5x, even better. Example: If you make $200K combined, you can afford $500K.
Reduce your car note. Your debt-to-income ratio is one of the first things lenders look at when it comes to assessing how well you’ll be able to afford mortgage payments. Debt could be the difference between approval and not being approved.
Make a strong down payment and set up predictable payments. You'll want to put down at least 10% and lock in a fixed-rate loan. Home loans are not a one-size-fits-all model. A fixed-rate loan prescribes a single interest rate — and monthly payment — for the life of the loan, which is typically 15 or 30 years.
What are the common buying mistakes to avoid?
Buying too much home. Your SmartPath Coach can help you assess what’s affordable for your particular budget and help you avoid the trap of being “house poor”.
Skipping a thorough inspection. While another expense might seem like the last thing you need when you’re buying a house, it's important to get a professional home inspection to get a better idea of what condition the property is in and what expensive problems might be lurking.
Not negotiating. Make offers on multiple points – price, closing cost, allowances, closing date, etc. This makes negotiating easier. Here are some tips on negotiating.
Parting Shots
Don’t be house poor. Make sure you’re ready to buy. And keep in mind, this can be a long process. Be patient, take your time with each step and you'll be set for a homeownership dream come true.
