Are You Ready to Buy a Home? 6 Questions
Conventional wisdom to the contrary, young people still want to become homeowners. A recent study by the Urban Land Institute found that fully 70 percent of Millennials expect to own a home within the next five years, and over 90 percent expect to do so at some point in their lives.
It's also a pretty good time to buy. Mortgage rates remain near historic lows and buying is even cheaper than renting in most major metropolitan areas, according to an analysis by Deutsche Bank and the Wall Street Journal.
But are you ready to pull the trigger? It's a big decision, and one that can be a bit intimidating when you think about the commitment you're making. One way to make the decision easier is to break it down into smaller parts. If you can give positive answers to the following, then you're a good candidate for home ownership.
1 - Can you afford it?
This is the most important question - and it's about more than simply being able to cover the monthly mortgage payment. Home ownership also has ongoing and often unexpected costs, and you need to be able to pay for those as well.
Your monthly payment will also cover more than just the mortgage itself. Your monthly statement will also include billings for your homeowner's insurance and property taxes. Depending on the size of your downpayment, you may have a monthly charge for mortgage insurance as well. These can easily increase your monthly bill by 25 percent or more above the cost of the mortgage itself.
You can easily calculate what your mortgage payment would be for a given home price and mortgage rate by using an online mortgage calculator, such as those listed at the bottom of the green bar at right. From there, you can add in a rough estimate of what your additional charges would be, or obtain more detailed information on local tax and insurance rates to get a more precise calculation of what your total monthly payment would be.
In addition to your monthly mortgage payment, you also need to make an allowance for maintenance and repair costs. Figure on spending an average of 1 percent of your home's price each year, but remember that it will vary. Major, but infrequent expenses such as a new furnace or roof will inevitably occur, so you'll spend more in a few years and less in most.
2 - Can you make a down payment?
This is related to #1, but has to do with the money you have saved, rather than what you're bringing in every month. Fortunately, it's not quite the obstacle many people make it out to be.
You only need 3.5 percent down to be able to qualify for an FHA home loan. You can also qualify for certain conventional mortgages backed by Fannie Mae or Freddie Mac with as little as 3 percent down.
Home loans with minimal down payments tend to be more costly than other mortgages, through higher fees or interest rates, so there is some benefit to making a larger down payment if you can do so - even putting down 5 percent rather than 3 percent on a conventional loan can mean a lower interest rate and cheaper mortgage insurance. You'll get the best rates and avoid mortgage insurance entirely if you can put down 20 percent or more.
Even so, you don't necessarily want to tap out your savings in order to maximize your down payment. You'll want to keep some kind of reserve to guard against unexpected major repairs or a disruption to your income. Savings or other liquid assets equal to six months of mortgage payments is usually considered the minimum, 12 months is even better.
It's worth paying a bit more on your mortgage each month in order to have the security of a backup fund in case of emergencies.
3 - How is your credit?
For most people, credit isn't the obstacle to getting a mortgage that it's often made out to be. The fact is, nearly three-quarters of the population has a FICO credit score of 650 or above, which is perfectly adequate to qualify for a mortgage. Another 12 percent has a score in the 600-649 range, where you might experience some difficulty but it's still possible to get a loan.
The bigger problem with a lower credit score is that it's likely to make it more costly for you to get a mortgage. The best mortgage rates go to borrowers with scores of 740 and above (still about 40 percent of the population); as you go below that, the rates you're charged on conventional loans begin creeping up at an accelerated rate.
That's why FHA loans are often a better deal for borrowers with sub-700 scores. The FHA doesn't charge higher rates for lower credit scores, but does charge more for mortgage insurance than you're likely to pay on a conventional loan. So Fannie/Freddie mortgages tend to be a better deal for borrowers with very good credit, while FHA loans are often better for those with scores in the 600s.
4 - Are you planning to stay put for awhile?
It doesn't make much sense to buy a home if you're planning to move again in a few years. Why? Because you have to pay closing costs every time you buy or sell a home.
For a buyer, closing costs typically run between 3-6 percent of the price of the home. For sellers, the commission paid to the real estate agent or broker is often around 6 percent. So each time you move from one home to another, that's going to take a bite out of your wallet.
That isn't so bad if you've lived in a home long enough so that your accumulated equity and the savings you've realized compared to renting outweighs the costs of selling that home and buying another. But it's hard to do that on a 30-year mortgage in less than four or five years, unless you're in a market with rising home prices. So if you think you might be moving again in just a few years, you're probably better off renting until you're in a more settled location.
5 - How secure is your job?
The typical mortgage for a first-time homebuyer is a 30 year loan. That means you want to be confident you'll have the money coming in over the next 30 years to make those payments month after month.
A lender will usually want to see that you've been in your current job or career for at least two years before they'll approve you for a mortgage. But you also want to be sure there are no storm clouds on your own horizon that could find you out of work with a mortgage to pay.
While no one can be absolutely sure what's going to happen with their company or in their business a few years down the road, we usually have a fairly good sense of the way things are going. If you sense there's any uncertainty out there - changes afoot in your industry, a tense relationship with a superior, or even your own sense that you might want to change directions in your career - it might be better to hold off on buying a home until you're on more solid ground.
6 - Are you ready to be your own landlord?
The realities of having sole responsibility for maintaining a property and taking care of necessary repairs come as a shock to many. Most new homeowners don't fully appreciate how much time and money is involved until they're actually in that position. There's a reason that the home improvement and hardware stores are always crowded on Saturdays - that's when homeowners often take care of all those things they couldn't get to during the week.
If the basement floods in the middle or the night, the roof starts leaking or the toilet gets clogged, you're the one who has to take care of it. Granted, that often may involve calling someone to come fix it, but in the meantime you're the one who has to spring into action to minimize the damage. And there will be time-consuming routine tasks - such as mowing the lawn - that you'll likely have to do on your own.
Many people get enjoyment and satisfaction out of these things, as they enhance their sense of ownership, independence and competence. But others would rather spend their weekends on the golf course.
Of course, you can minimize your maintenance requirements by buying a condo, in which case the property management will be responsible for everything on the exterior of the unit. You'll still be responsible for taking care of the interior, but you'll be spared a lot of the more time-consuming chores that come with a traditional home.
Choosing to become a homeowner is a big decision. But if you work through it methodically, you'll be able to make the right one.