Are You Really Ready To Buy A Home?

July 09, 2018

With mortgage rates and home prices on the rise, many people are scrambling to buy a home before homes become even less affordable than they already are. If you don’t own a home, should you jump on the home buying bandwagon? Here are some questions to ask yourself first:

How long will you keep the home?

Don’t count on home prices to keep rising forever. At some point, rising mortgage rates and a weaker economy could mean lower home prices just when you want to sell. Just like with stocks, real estate should be thought of as a longer term investment for at least 3 – 5 years. Unlike stocks, falling prices could leave you owing more in mortgage debt than you own in real estate.

Even if home prices don’t fall, real estate transaction costs can more than wipe out any short term profits you make. In some cases, renting can make more financial sense. Check out this calculator to see how long you’d need to own a particular home to come out ahead of renting.

How much can you afford?

Take a look at your actual expenses to estimate what you can afford to pay. Don’t forget to include home insurance, property taxes, and possible HOA fees in addition to the mortgage payment. It’s important to do this before you start looking at homes and talk yourself into believing you can afford something that you can’t. (don’t forget increased utilities if you’re looking to upgrade to a larger space either)

How much do you have in savings?

Ideally, you want enough to put 20% down and avoid having to pay private mortgage insurance. You’ll also need 1-3% to cover closing costs plus however much you intend to spend on moving, renovations, and furnishings. Keep in mind that this is on top of the 3-6 months of necessary expenses you’ll need in your emergency fund, especially now that you’ll be on the hook for maintenance and repairs.

How is your credit score?

The lowest credit score to qualify for a mortgage is typically 620 for a conventional loan and 580 for an FHA loan. A credit score of 740 is generally needed to get the best rates though. If your credit score needs some improvement, you may want to start by checking your credit reports for errors (you can get them for free every 12 months at annualcreditreport.com) and dispute any negative ones that you find. Paying down debt and making on time payments helps too. You can get a free credit score and evaluation at creditkarma.com.

Do you have any high interest debt?

In addition to improving your credit score, paying down debt can also improve your debt-to-income ratio. This doesn’t mean you need to be completely debt free, but lower is better. Focus on high-interest debt like credit cards and personal loans.

If you plan to keep the home long enough to make it worthwhile, know how much you can afford, have adequate savings, a good credit score, and no high interest debt, you’re ready to buy a home. Just be sure to stick to your housing budget. If not, you may want to get your proverbial house in order before you buy one.