If you have found yourself wondering “I want to buy a house, but I’m not sure if I’m ready.”, then there are a few questions that you need to answer before you jump into the buyer pool. These questions have a lot to do with finances, and some have to do with your current life stage. These 7 questions are the most important to have answers to before starting your real estate journey. If you are unsure where to start, call a Build Idaho real estate agent and we can point you in the right direction.
Do I have enough money for a down payment?
The rule of thumb is to have 20% ready for a down payment. However, this can be difficult for those upgrading to a larger home and nearly impossible for first-time homebuyers. However, there are many government-backed loan options, as well as homebuyer assistance programs out there to help get people into homes much sooner. FHA loans require a down payment of 3.5%-10% and conventional loans have a 3%-5% minimum.
With this assistance, a 3% down payment on a $300,000 home is $9,000. To this end, if a couple that gets paid twice a month each saves $200 from each paycheck, they will save $9,600 in 12 months. However, it is important to note that down payments of less than 20% will often carry private mortgage insurance (PMI), which is extra protection the lender puts on the loan in case of default. PMI is added into the monthly mortgage payment.
Do I have a extra savings and emergency fund set aside?
Even though the savings goal is often for the down payment, it is a good idea to have extra funds set aside that won’t be included in any earnest money or down payment. A savvy home buyer should have extra money tucked away for closing costs and any repairs that may need to be addressed shortly after closing.
Closing costs are usually 2%-5% of the final purchase price and account for legal fees, lender fees, taxes, title fees, etc., and must be paid at closing. using the $300,000 house example from above, closing fees will likely be between $6,000 and $15,000.
Savings also come in handy with fixing known issues that were found during the home inspection, as well as surprise issues like a broken refrigerator, faulty garage door, or massive windstorm that knocks the backyard fence over. Having some extra money set aside for an emergency will allow you to deal with these problems as they happen.
Is my credit score good enough to buy a home?
This is one of the most common questions we hear, especially from first-time homebuyers. Luckily, you don’t need perfect credit to qualify for a loan. The lowest you would likely have in order to qualify would be above 600, but more favorable rates are found above 700. We have an article that goes into more depth here.
What is my debt situation?
Good news! You don’t have to be debt-free to buy a home. It is nearly impossible to be entirely debt-free between car payments, mortgage payments, college debt, credit cards, and other bills. Lenders know it is wholly unrealistic to be debt-free, so they look at your debt-to-income ratio (DTI) to determine your loan eligibility. Your loan officer can provide you with details about what your DTI is and how much you can afford to pay every month on the loan.
Can I afford my monthly payments?
Tying into the last point, your mortgage lender can provide you with specific details about how much you can afford to pay every month after looking at your income statements, tax returns, and current market conditions. Our free mortgage calculator can give you a good estimate about how much you can afford, but your lender can give you a number that is tailored to you specifically.
In addition, you should factor in other financial factors of homeownership such as property taxes and insurance, HOA dues (if applicable), utilities (water, electric), and home expenses (trash, sewage, internet, etc.). Before you jump into homeownership, do some research, and crunch some numbers about rates in your area and how much you can realistically afford.
Do I have steady income/employment?
Having an income is important because you have to actually make your payments every month. Steady income and employment are even more important because it shows the lender how much you are making every month and that you are taking home enough money to make your payments every month. If you think your employment may be in trouble or your income may decrease in the near future, hold off on getting pre-approved and buying a home until things smooth out, and/or you get a new job.
Am I planning on putting down roots?
There is nothing stopping you from selling your home 6 months after buying it. However, the longer you live in a home, the more equity you are able to build. The more equity you have in your home, the bigger your profit will be when you sell it. If you aren’t sure if you are going to stay put for at least a few years, consider continuing to rent until your future plans have more certainty.
If you answered yes to these questions, you are likely in a good situation to buy a house. Buying a home is an essential part of the American Dream, but takes a lot of work to achieve it. But, like anything worth having, the payoffs are more than worth the effort it takes to achieve them. If you are ready to start your home buying journey, give us a call today and we can set you on the path to real estate success.