Or, call me at: This post is part 1 in a series of posts entitled “How Can I Get a House” that outlines the basics of how to become a homeowner, including preparing your finances and credit, getting a mortgage, and the process of closing the deal.
Should I Buy a House Now?
Home values and rates have fallen significantly over the past few years, so affordability is the best it’s been in a long time. But whether or not you should buy a house now depends on your financial situation, goals, and what’s going on in your local real estate market. Owning a home is a big financial commitment, so it’s important to make sure you’re ready for it. Not only will you be responsible for paying for your mortgage, you’ll also be covering property taxes, insurance, HOA fees, repairs, and maintenance – as well as keeping up with your other normal expenses.
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When you buy a home, you’re investing in and committing to a local community as well as establishing an important business relationship with your lender. These are not easy commitments to break away from later, so you want to make sure you’re ready to make the commitment before you sign on the dotted line.
A Few Considerations to Keep in Mind
Before taking the plunge on a home purchase, I would encourage you to really think about your plans for the coming years, do some homework on the real estate market where you’re planning to buy, and evaluate your finances. The following are a few considerations I would recommend keeping in mind as you evaluate whether or not you should purchase a home:
1) Do I plan to keep the new home for at least 3 to 5 years? If you think you’ll only live in the home for just a few years, it may not be worth buying until you plan to be more permanent. It can cost 2% to 6% of the price of the home for both the purchase and the sale, plus you’ll be paying for property taxes, insurance, and maintenance. If you’re planning to be more temporary, it may make more sense to rent and not be locked into homeownership.
2) Is buying a home cost-effective compared to renting? A good rule of thumb for deciding whether to rent or buy is the buy-rent ratio. If you divide the typical purchase price of a home you want to purchase by what it would likely rent for and come up with a number around 15 or below, then purchasing probably makes more sense than renting. If the buy-rent ratio is well above 20, then renting is more cost-effective than owning.
Use RentoMeter.com to get an idea of what a particular home would rent for. Another great resource to determine whether you should buy or rent can be found at the New York Times website.
3) Is the local real estate market relatively stable? Though home prices overall have corrected significantly since the housing bubble, there are still many areas of the country where home values are somewhat inflated. It’s important to take into account the stability of your local market before you buy a home.
If you plan to never move out of the area, the ups and downs in home values probably won’t matter that much to you. But if you think you’ll move within 5 years, it’s important to consider the stability of the market when making a purchase decision.
I encourage you to consult local real estate professionals in your target market to help determine the stability of the market. Keep in mind their ultimate goal is to get you to buy a house through them, so they may tend to be a little rosy in their projections.
Some additional resources for great real estate information can be found at Trulia.com, HomeGain.com, and Realtor.com.
4) Am I financially strong enough to purchase a home? This is probably the most important question you should ask before you consider buying a home. As I’ve already mentioned, owning a home is a big long-term commitment and one you can’t easily get out of in a hurry. The current epidemic of foreclosures is a stark reminder of the risks of buying a home with tight or shaky finances.
Before you buy a home, it’s important to take a hard look at your finances and make sure you are truly in a position to comfortably afford it. If you’re not yet in the financial position you should be, then check back for future posts in this series. I’ll discuss more about how you can make yourself more financially fit for homeownership.
5) Will I be able to keep up with my payments if I lose some or all of my income? It’s a turbulent job market these days, so it’s important to consider what could happen if your income is cut or lost altogether. Are your finances so tight that you have no tolerance for even a modest cut in your income? If so, it might not be the best idea to buy a home until you reduce your obligations or increase your income. The last thing you want to end up facing is foreclosure, which could cost you much or all of your investment in your home and severely damage your credit for years to come.
6) Can I get a reasonably good mortgage deal with my current qualifications? If you’ve had some ups and downs with your credit, it may pay to rebuild your credit first, then buy a home. Your credit is a big part of your mortgage qualifications and having bruised credit could end up costing you a lot of extra money on your home loan. It doesn’t necessarily take long to rebuild your credit, but the extra effort could help you get a much better mortgage deal that could save you thousands in interest over the life of the loan.
Conclusion
If you have strong a strong financial profile, reasonably good credit, and are planning on sticking around in the home for a while, today is a great time to buy a home. Falling home prices and low mortgage rates have made homes more affordable than they’ve been in years.
However, if it’s a stretch to buy a home and you have shaky qualifications, now probably is not the time. Take the time to better your financial situation first, then when you’re ready to buy a home, it will be far less stressful and much more enjoyable for you.
How Can I Get a House Part 2: Preparing Your Credit to Qualify for a New Mortgage >
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