Ask Yourself These Questions Before Buying a House
When we think about the “American Dream”, purchasing a home is almost always included in that discussion. Owning a house is considered a major life milestone, a benchmark of success, and perpetuates the idea you are doing this “adulting” thing correctly.
But how do you know when you’re ready to buy a house? Is it ever really necessary to purchase a home? What’s escrow? Or PMI? Why do all the real estate agents in my town have the same haircut (based on an actual observation I made in my southern city)?
What kind of home do you want?
Depending on where you live and the size of your budget, you could be looking at buying anything from an apartment to a ranch style house on several acres of land. What kind of home suits your needs? How many bedrooms, bathrooms, and square footage is necessary?
In the early 2000s, before the collapse of the housing market, people forgot the basic rules of thumb for buying a home. Because predatory mortgage lenders were handing out loans like candy, far too many Americans bought real estate out of their price range. The homes people bought in the early 2000s far exceeded the owner’s needs, and when the market crashed, they were left paying for it dearly.
You need to know what kind of home you want, but also what you need. Remember, just because you can buy a 3000 square foot, two car garage, new home with granite counter tops doesn’t necessarily mean you should.
Do You Have Enough Saved for a Downpayment?
It’s generally recommended you save 20 percent of the purchase price to use as a down payment. Why 20 percent? First and foremost, you’ll avoid primary mortgage insurance (PMI). PMI is extra insurance lenders require if your down payment is less than 20 percent of the sales price or appraised value. By avoiding PMI, you’ll save thousands.
Other good reasons to save 20 percent for a down payment include: a far greater chance you’ll actually qualify for a mortgage, smaller monthly mortgage payments, you’ll likely receive a lower interest rate on your mortgage loan, and it’ll help build equity faster.
So if you don’t quite have 20 percent of the purchase price saved, it’s probably wise to hold off buying that home.
Is This Purchase Going to Give You a Liquidity Problem?
Far too often people who purchase a house find themselves strapped for cash immediately following the closing. Make sure you have enough money for your living expenses after the closings costs, moving expenses, and down payment have been made! Also, be sure your monthly mortgage payment won’t drastically diminish your cash flow.
Can I Afford Maintenance Expenses?
If it can break or go wrong, it will. This is my home owning motto. I’m an optimistic person, but it’s hard to remain positive when you own a home. Houses, no matter how big or small, are full of things requiring maintenance. It’s important to know what needs fixing before you buy a house, but you should also have some cash set aside for the inevitable repairs you didn’t anticipate. Expect the unexpected when it comes to fixing your home.
A good (not good) example: on my fifth day of home ownership, a powerful rainstorm wiped out a portion of my yard and newly constructed fence. It left a hole big enough for my large golden retriever to sneak out of the yard at least once per day. Another example, last week my parents experienced a random and powerful gust of wind that sent one of their house’s gutters 100 feet down the road. Fun times.
Do I Plan on Living Here for the Next Several Years?
I generally don’t recommend buying real estate if you don’t plan on living in a place for several years. There are exceptions to this rule (if you want to convert it into a rental for additional income or you’re planning on flipping the home, that’s great, but that comes with a whole new set of challenges), but for the majority of people, you’ll want to have your roots down in an area you feel comfortable staying for many years. Buying and selling homes is not easy, nor is it cheap, so for the sake of financial stability ask yourself if you plan on staying put.
Do I Have a Good Credit Score?
Your credit score comes into play anytime you want to make a purchase large enough you’ll need a loan. If you have a good credit score, you’ll be offered better terms and interest rates. This will save you thousands of dollars. Good credit is important. If you want to raise your credit score before buying a home, make sure you’re paying down debt (try to pay your credit card balance in full each month), don’t close unused credit cards, and don’t apply for new credit cards. Make sure you set monthly reminders to pay your bills on time!
Do I Have Good Job Security?
If your job is at all at risk of ending or being shipped elsewhere, DO NOT BUY A HOUSE. Purchasing a home is not the same as signing a one-year lease. This is a commitment you should take very seriously. If your job is not secure, you’re better off renting.
Why Do I Want to Buy a House?
This seems like a silly question, but it’s important to know your motivations for wanting to purchase a home. Are you doing it because you’re feeling societal pressure? Do you want to plant roots in a town? Are you treating a house as an investment? Ask yourself these questions and why you feel it’s the right time and decision to switch from renting to owning. Being aware of your own intentions and motivations will help you make an informed decision not solely based on emotion.
Finally, remember there is nothing wrong with renting! I know it’s tough to watch friends and family buy homes while you continue to rent, but keeping up with the Joneses has never been a good strategy. If you’re starting to feel like you have to own a home, but aren’t sure if you’re ready, do not succumb to the pressure! Your financial stability is far more important than your ego.