You may have heard some of this home buying advice before, but since I have a different way of looking at things, maybe this advice will help you…
I decided to write a guide about buying a home and discuss some of the things you need to consider. By the end of this article you should have a better understanding of some of the basics of buying a home. You may have heard some of this before, but if it is being repeated over and over again, there must be a good reason.
Plus I do have some different ways of looking at things you may not have heard before.
Just Because You Can Doesn’t Mean You Should
It may be surprising to hear that buying a home is NOT always the best choice for everyone. It is a very serious decision that should never be rushed into. Buying a house is probably going to be the largest financial decision you will ever make.
You need to decide that buying a house is the right thing for you at this point in your life!
Does Buying a Home Make Sense For You?
Here are a few things to consider when determining if buying a home makes sense for you
- Do you have reliable income?
- Do you have good credit?
- Can you afford the down payment and closing costs?
- Would you like to build wealth via your home’s equity?
- Would you enjoy the tax advantages?
- Are you ready to either pay for or do all the home maintenance and improvement projects?
- Do you have savings in case you suffer job loss/lay off, long-term illness, or other financial setback?
- Are you ready to put down roots for at least 5 to 7 years?
If you are not 110% sure about buying a house, then you need to understand there is nothing wrong with renting. It is better to NOT buy a home than it is to buy a home BEFORE you are ready.
Renting Makes Sense If:
- You move frequently or suddenly
- The thought of unexpected home repairs scares you
- You don’t have the time or money for home repairs /improvements.
- You are not ready financially
Everyone is different and whether or not buying a home makes sense for you depends on both the numbers and your personal situation and long-term goals.
Owning a home goes far beyond just the financial aspect. However…
Let’s Crunch Some Numbers
There are certain aspects of owning a home that cannot be quantified by just crunching the numbers. The real value from owning a home comes from things that are deeper and have more meaning than just the cold hard numbers.
But The Numbers Must Work!
One of the first things you need to do is decide what’s affordable and your maximum price. Don’t look at homes until you know how you are going to pay for the home and what you can afford.
Life is for living and you should not spend every dime you have on your monthly housing expenses.
Remember it isn’t just your monthly mortgage payment you have to consider. You must allow for property taxes, insurance, maintenance and those unexpected things that pop up.
If you are renting, do not fall into the trap of thinking you can suddenly pay more. Your monthly budget for housing does not change simply because you are a home owner. If you can comfortably afford X dollars every month when you are renting, then you should try to stay as close to X as you can.
How Will You Pay for Your New Home?
One of the first decisions you must make is how do you plan to pay for your home? The 2 most common ways people pay for a home is either a mortgage or they pay CASH for the full purchase price. Paying all cash is pretty straight forward so I am going to discuss using a mortgage to buy a home.
How Much You Can Afford Depends on Several Factors:
- Current mortgage rates
- How big is your down payment
- Your income
- Your expenses
- Your credit
- And much more!
Let’s look at some of these factors briefly:
Mortgage rates change CONSTANTLY. What rate you can get for depends on several factors, such as what type of mortgage you select as well as your credit.
The more you can put down, the better. If you do not make a big enough down payment, you may need to pay what’s called Mortgage Insurance ( often called PMI ) each month. However, there are some mortgages that don’t require HUGE down payments!
Talk to your lender about mortgages that have lower down payment requirements. Just remember that a lower down payment could mean you are going to pay for Mortgage Insurance or have a higher interest rate.
I am going to really simplify this and say that you must have an acceptable debt-to-income ratio. Your DTI or debt to income is your gross monthly income compared to the minimum payments on all recurring debts. The lower your debt-to-income ratio, the better your chances of being approved for a mortgage.
If you are unsure about your credit, then checking your credit report is one of the first steps you need to take. Your credit has a MAJOR effect on if you qualify for a mortgage and your mortgage rate. Sadly, there could be mistakes on your credit report that could prevent you from getting a mortgage.
Your credit score is a number that helps lenders decide if they will give you a loan. A higher credit score may help you get a lower interest rate on your mortgage.
Pre Approval Letter
One thing to do when you talk to your lender is to go ahead and get your Pre-Approval Letter. Why get Pre-Approved?
It saves you time by letting you search for homes that you KNOW you can afford. A Pre-Approval Letter estimates what you might be able to borrow ( provided your financial status doesn’t change ).
A Pre-Approval Letter tells you how much you qualify for, the potential interest rate (you might even be able to lock-in the rate); and you’ll be able to see an estimate of your monthly payment (before taxes and insurance because you haven’t found a property yet).
Closers Not Posers
A Pre-Approval letter shows sellers that you are a serious and qualified buyer. In other words, that you are a CLOSER and not a POSER. Many sellers will not consider offers unless they are accompanied with a Pre-Approval Letter. Also most experienced REALTORs are going to require they have one on file BEFORE they start showing you homes!
Getting a Pre-Approval Letter means you will complete a mortgage application and give the lender your income documents ( such as W2s, 1099s, etc ) and personal records. You will have to pay an application fee so the lender can pull your credit report.
I must stress that just because a bank is willing to loan you a certain amount does NOT mean you have to spend that much. Instead base your maximum price on what is best for you! Just because a bank is willing, for example, to loan you $500,000 does not mean you must buy a $500,000 home. You can buy a less expensive home!
However, you cannot exceed the maximum that the bank Pre-Approved you for.
I suggest you base your maximum price by the monthly payment. You want a monthly payment that is very easy for you to make.
Where Do You Want to Buy a Home?
In real estate, location really is as important as you have heard. So deciding where you want to buy a home means doing some research on your own.
I suggest you narrow down your search to the neighborhoods, towns or school districts that appeal to you. I am sure many people think they will drive around on a pretty Sunday afternoon and check out the potential locations. Sometimes, Friday and Saturday nights will give you a better idea of what a neighborhood is REALLY like. And sometimes checking out the location during rush hour can make you aware of issues that you will not see on a Sunday afternoon.
The maximum price you set when you got your Pre-Approval Letter may mean you have to look in areas that are not at the top of your list. I suggest you also consider the distance you will need to commute and the distance to go shopping.
If you wind up tripling how much you spend on gas because your commute is longer, it changes how attractive a location or home really is.
You also need to think about your lifestyle. For some people, a condo in town is the right choice. For others, a home in the country with some elbow room is better.
Some neighborhoods or condo developments have HOAs or rules that you may not like. This is a very important consideration!
Even if you do not have children, be aware that school districts make a huge difference in the values of homes.
Every one is different and you need to consider if a location fits your lifestyle.
Want Versus Need
One of the hardest things for some people to overcome is understanding the difference between what they want and what they need.
I want a new Corvette but I actually need a truck. There is a BIG difference between what I want and what I need.
The same is true when searching for a home.
You need to think about exactly what you need. My suggestion is that you should think about homes that will be easier to sell someday. It may be a long time until you decide to sell, but when that day comes, you want a home that is easy to sell.
Make sure you measure all of your furniture and take a tape measure with you when looking at homes. It would be a shame to start moving in and discover that your furniture is too big!
Another size you should think about is the lot size. Some people enjoy spending their days off cutting the yard. For others, a smaller easier to care for yard is better.
When my wife and I purchased our home, we almost tripled our home’s size. We thought our home was going to look empty until we started moving in. I still don’t know how we had crammed so much stuff in our previous house.
Today, we are glad for the extra square footage. If you can afford bigger and it does not exceed your maximum home price, I suggest you strongly consider it.
Just remember it costs more to heat and cool a larger home.
Awesome Not Perfect
As you start looking for homes, you may be tempted to seek perfection. I have seen many many homes but I have NEVER seen a perfect home. I have seen plenty of homes that are awesome though.
You have to understand that you may need to compromise on some things when looking for your new home. Again, think about what you want versus what you need.
The Take Away:
Owning a home is an awesome experience but it is also a serious commitment. I beg you to think long and hard before signing any paperwork or biting off more than you can chew.
After you have done your research and plenty of soul searching, you may decide that buying a house is right for you. Once you have decided that buying a home makes sense for you, my advice is to find a local reputable Buyers Agent to assist you!