Are You REALLY Ready to Buy a Home?

When we bought our home three years ago, it was kind of a snap decision. I was in debt pay down mode because my husband and I had agreed that we weren’t ready to buy a home. Then out of no where, my husband announced that he wanted to buy a house. Immediately. So we began looking. We went on a whirlwind tour of our town and after three weeks we settled on a modest home whose payments we could afford. Our credit was excellent, and we “passed” the income audit we were subjected to (since my freelance income is our main source of income). We managed to scrape together enough of a down payment for a FHA loan, but it meant that we had to use the freshly paid off credit cards for a lot of other things for a couple of months.

Looking back, I’m not entirely sure we were really ready to buy a home. We hadn’t saved up enough of a down payment, and our budget was in transition since I was just starting to amass enough clients to make payments that were 1/3 of our monthly income. What if one of my clients fell through a couple of months in? To be honest, even with our good credit, if we hadn’t bought before the financial crisis, I don’t know that we would have been approved.

But we got the house, things took off with the freelancing, and now our hosing costs represent only 1/5 of our monthly income. But we were very lucky, and very, very blessed. Using hindsight, I can think of a few questions I should have asked myself before deciding to buy a home and having one under contract less than a month later:

  1. Do you have a stable budget? Look at your income. Is it stable enough to make regular mortgage payments? Make sure that you can keep up with your payments, and that the reliable portion income can handle your mortgage. Do a mock budget with home ownership, that includes estimated taxes, HOA fees, maintenance costs, utilities, repairs and other expenses on top of your monthly principal and interest payment.
  2. How long will you be in your home? The accepted rule of thumb is that you should buy only if you plan to be in your home for at least five years (seven is better). Think through career change possibilities, whether you will be moving when you are done with school, or whether additions to your household will necessitate an upgrade soon. If you move too soon, the costs you pay up front could result in a not-worth-it situation.
  3. Do you have a good sized down payment? We were fortunate, since we bought a modest home with a FHA loan that required only 3% down at the time (now it’s 3.5%). I honestly think that we really didn’t have enough of a down payment to justify buying when we did. Most lenders want to see 5% or 10% down, and the 20% rule is still a good one to aim for. The bigger your down payment, the less you have to borrow, and the lower your monthly payment will be.
  4. Do you have good credit? For the best mortgage rates, many lenders want to see a credit score of at least 760 these days. When we bought, our 720 at the time was more than sufficient to get the best rates. If you plan to buy a home, check your credit score, and see where you are at. You may need to pay down some debt, make on time payments and fix errors on your credit report in order to improve your score.
  5. Are you prepared for additional costs? Finally, you need to realize that there are closing costs and other expenses associated with buying a home. Are you prepared to pay out of pocket for these? Or will you have to add it to the home loan? It’s better if you can pay these expenses out of pocket. Also, understand that you may need to make improvements to your home, or, if it is new construction, put in a yard. Be certain you are realistic and ready for these possibilities.

Prices and interest rates are low right now, and if you have been thinking about buying a home, it might be just the time to do it. Carefully evaluate your situation, and make sure that you are truly ready to buy a home, and not just thinking that it would be a nice thing to do.

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Comments

  1. says

    All good points, but I’d like to camp on #2 for a bit. In the mortgage business I saw countless people buying homes who were a) fresh out of college, b) coming out of a divorce, c) only months out of bankruptcy or foreclosure, d) having just started a new business, e) having just moved to a new city, f) etc, etc, etc.

    All of these people were in transition, all of them wanted to buy as soon as possible. From my experience, I don’t think transition is a good state from which to buy a home. All of the buyer profiles above were recently out of one situation and they were looking to put down long term roots before the ground beneath their feet even proved to be firm.

    I have a suspicion that transitional buyers were a large part of the foreclosure wave seen in the last three years.

    Sometimes you’re best to wait until you’re situation is more permanent and the view of the future is clearer. A home is, after all a LONG TERM commitment, and until your situation starts looking long term, it might be best to keep your options open for what ever might come down the path.

  2. says

    I think one of the most overlooked costs are the “additional costs” you mention in #5. When I bought my first home I included some of these costs when we decided whether we could afford the home we were buying or not, but I was way too low. Fortunately I had a big cushion in my budget. So, it all turned out ok. I was reading once that you should factor in around 10% of the monthly mortgage payments (20% down, 30-year fixed). I think this is a pretty good yardstick, but the exact number depends on what kind of house you own: close to the ocean (saltwater!), townhouse, etc.

  3. says

    Miranda, those are great points. The ones that hit home for me are do you have a budget, how long will you be in the home and are you ready for additional expenses.

    We moved into our current home on a whim, similar to how your story sounds. We found ourselves a little upside down for the first year. Things are under control now but we’ve been talking about wanting to move and of course it’s just not the right time yet (with the market etc.) how ever a conversation before we bought about how long we expect to say would have saved the frustration we’re feeling now.

  4. KarenJ says

    Regarding point #3, don’t forget about PMI if you put down less than 20%. This is enforced insurance that people who don’t have a big payment have to pay that “20 percenters” do not. Look what happened to real estate values in the past three years. Those who are paying PMI will be paying a lot longer, since they’ve lost so much value in their home. I also think it’s wise to have your emergency fund in place before purchasing. I lost my job literally three days after moving in to our new townhome in March of 2007. Three months later, my husband was laid off. We were luckier than most with one year’s severance and a chance to regroup, but that could prove a disaster for the average person. Also, all those little things you buy for a new home and minor home improvements that come with moving in are better paid for in cash than put on credit cards. A brand new mortgage along with credit card debt is not a good way to make this exciting transition.

  5. says

    Someone I know told me that if you are buying a home, buy the biggest home you can afford, specially if you are in a profession where you can look forward to high income appreciation. This saves money in the long run as you do not outgrow your house as you move up the corporate ladder.

    Well we took the advice and now we think we hadn’t.

    Nothing wrong with the house, we love it, and the payments are affordable too. It is just that we do anticipate moving in the near future (job/better schools/better neighborhood/many other reasons) and feel that we could have gone with a cheaper starter house.

  6. says

    I think there is a lot to be said for moderating expectations and living modestly. We got the same advice as Arohan when we were looking, and one broker was willing to approve us for almost three times the amount of our current home. We could have done it, probably, since our income has increased since then, but we just didn’t want to worry about it. Plus, we have money to spend on other things that we enjoy, rather than sinking it all into a mortgage payment.

  7. says

    In many ways, buying a home is a bigger financial/legal commitment than marriage. That is to say, the move from renting to buying, is a bigger commitment in many jurisdictions than going from co-habitating to wedlock. Is anyone ever really ready?

  8. KarenJ says

    Alan, if you don’t like your house, you just put it up for sale and move. Worse case scenario if you can’t sell, you hang in for a few more years. If you don’t like your spouse, I think the financial consequences of undoing that are a little more devastating (and I speak from experience)! Thus, being financially ready is really the only criteria necessary. Arohan, it sounds like you’ve been talking to too many realtors! Most of them will encourage you to buy more house than you can reasonably afford. I believe you should buy the least inexpensive home, then use the equity you build over time to move up as your family grows, while using the savings to fund retirement and college.

  9. Graeme says

    Buy the biggest house you can afford?!? That sounds like some of the worst advice I have ever heard.

  10. Jenna says

    About your 5-7 year rule. What if you plan on buying a house even if you aren’t planning to stay in the area for that long, however you want to rent the house out when you move?

  11. says

    Jenna: I think it depends. If you plan to rent the home out, and you can find renters who can pay the mortgage for you, then it shouldn’t be a problem. Personally, though, I don’t think I’d like to deal with renters. You have to choose reliable renters who will pay on time regularly, and who will be there long term. Also, you have to be able to take care of maintenance and other issues, and come back into town. I know a lot of people do fine renting out a home like that, but I think it would be too much of a hassle. But if it is something that works for you, go for it.

  12. Jenna says

    Miranda: I agree with you, I’m not a big fan of dealing with renters either. However, I’d like to invest in a home, but since I’m fairly young I’m not sure where my career will take me in the next 5-7 years. However, I live in a place where I’m fairly certain I can find renters if I had too.

  13. Alex says

    Purchasing your first home is the biggest investment of your life! Last year I got myself into a house, especially taking advantage of the Obama incentive. But like you I did have a few questions afterward. There were a number of things I would have done differently. I wasn’t aware of the difference between conventional and FHA loans except the down payments are different, and the steps to follow up to the point when you close. I really needed a mentor! However, im in the process of purchasing my investment home. Even though I learn a few things from my first experience buying a home I found this website http://www.mysixpercent.com that showed me the terminology and steps to purchase a home. Thought I throw that in there incase it can help others, it did for me!

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