Whether you’re looking to purchase your first home or buying your 14th property as a landlord, there are many things to think about when buying a house. When I purchased my first home, most of the things going through my head were warm-fuzzies and not the practical, prudent things I should have been watching out for. I was the jolly, ho-ho-ho Santa instead of the Santa who checks his list twice. Being thorough and informed is incredibly valuable when buying a house. After all, a home is the largest purchase most of us will ever make in our lifetimes. Here are the things you should consider carefully, before you even start the home buying process.
Be Ready to Plant Roots
For most people, investing in a home won’t be financially advantageous unless you plan on sticking around long-term. You should probably only consider purchasing a home if you’ll be sticking around for at least five years – preferably longer.
Staying in a home longer means you’ll be able to add more principal through monthly payments and increase your overall equity. If you were to have several house purchases back to back, the costs of moving and refinancing would likely put you in a much worse financial situation overall than if you had just rented.
Buying a house isn’t for everyone, and that’s okay. If you can’t envision yourself staying in the same house for the next five or ten years or more, you may want to rethink whether becoming a homeowner is right for your situation.
Save a Nest Egg for a Healthy Down Payment
When my family decided it was time for us to stop renting and start owning, I got a second full-time job to accelerate the timeline for us to save a typical down payment for a home. However, we became impatient and were romanticized by the idea of independence and home ownership, and ended up applying for a USDA loan (for zero down) and got into a house probably sooner than we should have.
I wish now that we would have waited an extra 9-12 months for me to save a full 20% down payment before purchasing. Because we chose to use the USDA loan instead of a conventional loan, we are stuck paying MIP (Mortgage Insurance Payment, the USDA equivalent of PMI – Private Mortgage Insurance) for the entire life of the loan. If we had waited to have a 20% down payment, we could have saved ourselves that monthly cost completely.
Ideally, you’d be able to purchase a home with cash in full, and have no mortgage! However, this is not the case for most people. A better goal for most people is to save 20% of your home’s purchase price to use as a down payment, although if that isn’t feasible for you, other loan options are available at 5%, 3.5%, or even 0% down in some cases.
Be Prepared for the Long Haul of House Hunting
Everyone expects that buying a house will be like HGTV’s Property Virgins – look at three houses, pick one and move in! Unfortunately, the home-buying process can’t be watered down into 30 minutes anywhere but on television. Expect your experience to take longer, be more stressful and cost more – though headaches are free of charge! In all seriousness, don’t let my momentary pessimism deter you. Buying a home can be extremely gratifying when you approach it with the right mindset.
When we went house hunting, we must have scoured the internet for hundreds of homes and physically toured 30 or more. We made offers on three homes and spent three weeks negotiating with a contractor before calling it quits and moving on from the second house. It took us seven months of actively seeking a house to purchase before the stars aligned.
Now, not all purchases have to be this difficult. My wife and I were trying to make sure we got a good value for our area and were aggressive in our approach. We also weren’t in a situation where we needed to urgently move from our current location. This caused us to be more frugal in our home buying approach. If you’re looking to buy a home but need to move out of your current residence within a few weeks or months, it isn’t likely to work out unless you’ve got a place to crash in the interim. Having time flexibility will go a long way in helping you get the right deal for you.
Determine How Much You Can Afford
It’s really easy to get caught up in the moment when buying a house and spend $10-, $30-, $50,000 or more compared to what you can really afford. Of course, what you can afford is different for each person, but some basic calculations can tell you approximately what range you should be looking at.
Most experts agree that you can afford a monthly payment equal to 28% of your gross income. Monthly payment should add estimates of mortgage principal, interest, taxes and insurance (PITI), divided by your monthly income before taxes or deductions. Of course, being a homeowner comes with other costs, too.
For example, here are some additional expenses you might incur as a homeowner:
- Making the house “your own” – This has personally been our biggest expense. Paint, flooring, fencing, refinishing cabinets – none of these are full remodels, but they add up quickly nonetheless.
- Damages / Unforeseen Expenses – Even if you pay for a home inspection before signing on the dotted line (please, please do), it’s relatively common to get a lemon house, especially in older ones. From pest issues, to mold, to water damage or broken pipes, there are plenty of things that can go wrong after the purchase.
- Utilities – Most renters have their water, sewer, garbage, electric and even cable taken care of by the landlord. Make sure you’ve accounted for these additional costs when becoming a home owner.
- Time – Probably half of my spare time is spent crossing items off of the honey-do list. (I don’t mind – this is what I signed up for!) Unless you’ve got enough cash flow to pay for others to do all of your minor repairs and improvements, you should expect to spend an ample amount of time on maintenance and upkeep.
Remember that having your own place to live and call home is great, but being able to live your life afterwards is even better. Be careful not to overextend yourself and become house poor.
Play House Before You Buy a House
If you think you can afford the monthly costs of owning a home, prove it to yourself! Set up a budget with estimates of what it will cost you to own a home. Likely, this will be more than your monthly budget now. If you can do it, save the difference into savings for your down payment! This will help build confidence in your ability to own a home in your price range successfully.
This tip makes a lot of sense, and is something I wish I had done prior to owning a home. Luckily, we have been able to make ends meet, but I would have been a lot more sure about our financial future if we had taken this advice before we got into the real estate game.
Know Your Needs vs. Wants, and Be Realistic
Like I said earlier, it can be really easy to overextend yourself when buying a house. You might say things like “Look honey, it only adds $80 per month onto our bill – that’s not much at all!”, or “Having a hot tub (or tile flooring, or stone countertops, or a hot tub, or an extra bedroom/bathroom, or anything) would be so nice, and this is the only house we looked at that had one!”. Don’t play that game. Figure out what you can afford, and stick to your guns.
Be Sure You Have a Stable Income
Finding a new job… well, it sucks. Hunting, applying, interviewing, negotiating… it’s a process. It sucks even more when you’ve got the responsibility of a mortgage to account for. Making sure that your work is relatively stable will help keep a lot of future stress off of your shoulders.
Of course, not every job is as stable as another. If your work is prone to layoffs or the pay fluctuates with performance, consider saving more than a person with a more stable job would to cover the times when you’re out of work or work is slow.
Maintain a Good Credit Score to Secure a Quality Interest Rate
Not everybody considers their credit before starting the home buying process. When looking to purchase a home, your credit rating will influence what interest rates are available to you, and can also impact which financial institutions you can work with and how much you will be approved for.
This excerpt is taken from a previous article I wrote, covering why credit should matter to you:
A home loan that might cost 3-4% today with good credit may cost 7-8% or more with poor credit. Having a 3% interest rate on a $200,000 home loan versus 6% over a standard 30-year mortgage is a savings of $128,121.50! For some of you, this may be a wake up call – credit matters.
If your credit isn’t where you’d like it to be, it may be worth your time to improve your credit before buying a house. As you can see, the financial savings can be enormous! Practice good credit habits so you’ll be ready when it’s time for you to purchase a home.
There’s a lot to consider when buying a home – and this is just the readiness pre-check! I’m a person that likes to be prepared by nature – it’s the lingering Boy Scout in me – but, this is one important stage in my life I wasn’t as prepared as I wish I had been. Preparing to purchase a home can take time, but it is well worth the effort.
Think you’re ready to buy a home? Continue on to the next article in this series on things you need to know about the home-buying process.