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:
- 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.
- 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.
- 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.
- 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.
- 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.