Buying a home for the first time is one of the biggest decisions and commitments most people will make. There can be a lot of pressure to buy because it seems that’s part of being an adult and what you should do. However, there are times when it makes more sense to rent, such as having a job that could have you moving within the next year or two or planning to go back to school. You need to be able to make a commitment as well as be financially ready. So how do you know when it’s right? Here are some points to consider before shopping for your first home.
You’ve created and manage a budget.
It’s critical to have good money management skills when you are a homeowner. You need to know where your money is going every month and take control of frivolous expenses. If you don’t have a budget, make one right now so you have a better understanding about where you stand financially.
You’ll also want to create a second budget where you factor in the estimated additional home expenses such as insurance, property taxes, association fees, utility bills, and maintenance. Maintenance is one thing that is often overlooked in a budget. When you are renting, there is a landlord to take care of any issues that arise with the home. When you are a homeowner, you’re on your own. There will be things that need to be maintained or replaced over time and you need to make sure that you are budgeting for those so you aren’t caught with empty pockets when the time comes.
You’ve saved your downpayment.
Typically, you’ll need to have 20% of the cost of the home as a downpayment ready before purchasing. That means that if you are wanting a home that is $350,000 you’ll need to have $70,000 saved for your downpayment. There may be ways around that with special mortgage programs but be aware that they may cost you money in the end. Programs that let you buy a home with little to no money down typically require extra mortgage insurance and much higher interest rates. If you put a sizeable amount of money down on your home, you’ll have equity sooner, lower interest rates, and may not lose money if you have to sell your home sooner than expected. Also, don’t forget to save enough money for the closing costs, moving expenses, home furnishing and initial repairs or remodeling.
You have a reliable source of income.
It’s definitely important to have a steady source of income so you can be sure that you’ll be able to make your monthly payments. If you are buying a home with a spouse or partner, it is tempting to buy one that you can afford with your incomes combined; but what if one of you stops working or loses a job? What if you split up? What if you have a child? Will the extra child care expenses make your budget uncomfortably tight?
The amount of your loan approval may be based on two incomes, but you are not required to spend that entire amount. Choose the most reliable income and then purchase a home that is within those means and you’ll breathe a lot easier in the end.
You have an emergency fund equal to six months of expenses.
This is one of the hardest things to do for most people. This requires that you set aside money and don’t touch it unless it is a true emergency. What will you do if that job you were so sure was secure suddenly isn’t and you’re unemployed? What if you become seriously ill or there is a natural disaster that prevents you from working? Owning a home isn’t as easy to get out of, like a rental is, if you can’t afford it and have to go live with family or friends. It can take time to sell a house and just walking away can seriously damage your credit.
You should also create a separate savings fund for home maintenance. Surprises like furnaces going out, leaking roofs or pipes, a broken window, a kitchen fire, or sewer issues can occur anytime and be major expenses. Even if home damage is something that is covered by your home insurance, they are notoriously slow to pay and you’re better off waiting to be reimbursed rather than waiting to have it repaired. Have a fund so you are prepared to take care of the issue immediately on your own and get the insurance company to cut you a check.
You aren’t deep in debt.
You aren’t going to be able to qualify for a mortgage if your debt-to-income ratio is too high. Lenders want to see that home loan will be no more than one third of your monthly income and your total debt will be less than 38% of your monthly income. If you have credit or loans with large outstanding balances, work to pay those down so you are under the desired threshold. Also, don’t open any new credit or make any major purchases at least six months before you apply for a home loan.
You have good credit.
Ok, this one probably isn’t as important as the others. Yes, you need good credit but it doesn’t have to be perfect. However, the better your credit rating, the better your interest rate will be. If you are fairly young, your issue may be not having credit at all. Plan ahead and find ways to build a good credit history such as student loans, car loans and credit cards. Be diligent about making payments on time and never miss a payment. Also, make sure you check your credit report every year for any errors and get them corrected to make sure your rating stays high.
You can make the long-term commitment.
Buying a house is something you have to plan to stick with for at least 3 to 5 years and longer if possible. Selling your house sooner than three years can have tax implications as well as possibly lose money. If you think there is a possibility that you or your spouse may have to move in the next year or two for work or family, it’s probably not the best idea to buy a house. You could opt to rent your property out if you can’t stay but that’s a whole other blog post.
You’re ready for the responsibility.
Yes, there is a lot more responsibility to owning a home than renting. It’s not just the expenses but the work too. Are you prepared to make home improvements yourself? How about the lawn or pool care? What about shoveling snow every winter? If you aren’t going to do it, you’ll have to pay someone else to do it. You need to be a good neighbor and make sure to do these regular maintenance issues so your home doesn’t become the blight of the block. These are things that come with being a homeowner. Are you ready, willing and able?
After considering all of these points, do you think you are ready to purchase your first home? If not, don’t worry. Renting makes sense in a lot of situations such as when you may go back to school or move away soon. Don’t feel pressured to purchase because it seems like something you should do. Continue to save and plan; your perfect home will be waiting for you and we'll be here to help.