Homeownership is a significant goal for many Americans. One recent survey stated that 84% of Americans see homeownership as an excellent financial investment. Additionally, there’s a lot of messaging in our society that says that you aren’t an adult until you purchase your first home. After all, buying a home shows you’ve achieved a certain amount of stability: You have a steady job, you have savings, and you know where you want to live for the foreseeable future. You might also choose to purchase a home because of affordability issues. Housing prices continue to rise in many areas of the country, but in some places, rents are rising even faster. In 42 states, it’s actually cheaper to pay a mortgage than it is to rent a comparable home.
However, buying a home isn’t easy. There are many questions you should address before you start searching for your dream starter home.
Are You Financially Stable?
You don’t need a trust fund to buy a house, but it is a good idea to have an emergency fund. Do you have a few months’ worth of expenses saved up? After all, people do lose jobs unexpectedly or have health issues crop up. A well-stocked emergency fund means you can continue to pay essential bills, like your mortgage payment, if a catastrophe befalls you. You should aim for three to six months of living expenses socked away in case of disaster.
Beyond savings, you need to consider your debt load. Will having debt stop you from attaining a mortgage? Not necessarily. After all, 44 million Americans have student loan debt, and many homeowners are among that number. Mortgage lenders are more concerned about your debt-to-income ratio. If you have sufficient savings and a workable debt-to-income ratio, you can start moving forward with purchasing a house. Otherwise, focus on paying down debt for now, then work on socking away money into an emergency fund.
Do You Have Money for a Down Payment?
Mortgage lenders require you to put some money into the house when you purchase it. Having the savings necessary for a down payment shows the lender you are capable of saving money, and it gives you immediate equity in your new home. Some programs exist that allow you to purchase a home without a down payment. These include VA and USDA mortgages and some first-time home-buyer assistance programs. However, you’ll still need money for the various expenses associated with purchasing a home. These include inspections, appraisal fees, and loan origination fees. Additionally, many buyers must cover their closing costs, which usually amount to 2% to 5% of the home’s purchase price.
How much of a down payment will you be expected to put down if you have an FHA or conventional loan? For FHA, you have to put down 3.5% if your credit score is over 580 and 10% if it’s less than 580. Conventional mortgages require a down payment of between 3% and 20%.
How Is Your Credit?
Good credit is needed for securing an affordable mortgage. The FHA has vastly different down payment requirements for people with scores above and below 580, and conventional loans require even higher credit scores: You’ll need at least a 620, but some lenders require a score of 700. Did you know you are eligible for a free credit report each year? Look for any negative entries and try to address them before you buy a house.
What’s Your House Budget?
Before you start looking for your dream home, you’ll need to know how much house you can afford. Beyond just paying off the home’s mortgage (and the associated interest payments), you’ll need to consider property taxes, homeowners’ association fees, homeowners’ insurance, and the ongoing costs of maintenance and repairs. Many online calculators will help you estimate how much house you can afford. However, this won’t include the 1-3% of the purchase price you should expect to pay each year for ongoing maintenance.
What’s Included With the House?
Once you start looking at houses, make sure you ask about what exactly is included in the sale of the home. Typically, anything attached to the home (like cabinets, blinds, or light fixtures) must stay. However, you should always check with your real estate agent and have them ask for anything you’d like the sellers to leave. Frequently requested items include kitchen appliances and washers and dryers. However, you can ask for any item when you make an offer. Conversely, you can make sure your offer spells out things you want the sellers to take (a broken pool table in the basement or an old lawnmower behind the shed, for example).
How Old Are the Major Components of the House?
Beyond the age of the home, you want to look at the age of the major components and systems of the home. For example, replacing a roof is an expensive undertaking. A new roof can easily cost between $5,000 and $15,000, so you’ll want to know how old the current roof is and make sure it’s in good condition. The same goes for the other significant components, like the HVAC system, water heater, and appliances. Even if you think the house is a good enough deal that dealing with aging appliances is worth it, you’ll want to start budgeting immediately for their upcoming replacement. If there’s a home emergency for which you are not financially prepared, it is important to understand all of the lending options available to you; a title loan or personal loan may be applied for in order to cover the cost of emergency repairs.
What’s Wrong With the House?
No house is perfect. Make sure that you have a reputable home inspector look at the property before the sale is final. If the inspection raises any questions, then you’ll want to follow up with other professionals (like roofers, chimney repair people, electricians, or plumbers) to get a fuller understanding of any potential issues. The seller should provide a seller’s disclosure that lists any known issues, like lead paint, radon, mold or asbestos within the home; any electrical, plumbing, or structural issues; pest problems (including termites); known flooding or wildfire problems; and any known toxins on the property. However, not all sellers are required to provide a disclosure. Foreclosures and houses being sold as part of an estate don’t have to provide disclosures, for example.
Another way to understand any underlying issues with the home is to ask for a Comprehensive Loss Underwriting Exchange, or CLUE, report. The CLUE report will list any homeowner’s insurance claims from the past seven years. You’ll be able to see if the home has suffered any damage from weather events, water damage, or break-ins that your home inspection might miss or a seller’s disclosure might fail to disclose.
And How Is the Location?
You can change just about anything about a house (with enough money!) except for one thing: the location. Start with the obvious things. Will you have a decent commute? Does the area have good grocery stores, restaurants, libraries, parks, bars, day-cares, or whatever else you need close at hand? How are the local schools? Ask your real estate agent to help you find information on school rankings, crime statistics, traffic problems, and neighborhood amenities. Visit the home and the neighborhood at different points in the day and night to get a good feel for the community. Talk with any neighbors you see to get a sense of how friendly the neighborhood is. Also, use the Internet to your advantage: Look at social media communities aimed at the neighborhood to get a good sense of what issues the area faces on a regular basis.