Home Buyer’s Guide Part 1

Decide if You are Ready to Buy a House

Are you ready for the commitment of homeownership?
Purchasing a home is a major commitment, so take a look at your current life situation before you start looking at houses and comparing mortgage rates.

Are there any significant life changes you expect in the next several years?

Major changes like switching careers or having a baby can have a big impact on your financial situation, so it’s important to assess how your finances might change due to significant events like this:

  • Are you comfortable committing to staying in a house for at least five years?
  • Is your income stable, and are you reasonably sure it will stay that way?
  • Can you handle repairs on the house yourself, or if not can you afford to hire a professional in the event something breaks?
  • How long should I plan to own my home to make the purchase worthwhile?

You should generally only consider buying a home if you expect to live there for 5 years or more. This is a general guideline, but can vary depending on the local real estate market, rental rates, and the size of your down payment.

Renting vs. Buying
Both renting and buying have benefits, so you’ll need to decide what’s most important to you, and what best matches your situation.

Benefits of Renting:

Typically the landlord is responsible for repairs and maintenance, so you won’t need to pay out of your own pocket if something breaks.
You won’t pay property taxes or homeowner’s insurance. It’s a good idea to carry renters insurance, but it’s typically a lot cheaper than homeowners insurance.
Flexibility: if you decide you don’t like the home, or need to relocate for a job or other reason, moving out of a rental is much easier. You won’t need to sell the home or find someone to rent it.
You don’t have to worry about any of the risks involved in homeownership, like natural disasters or falling real estate markets.

Benefits of Owning:

You can upgrade, change or improve the home as you see fit, without needing approval from a landlord.
Interest you pay on your mortgage can be tax-deductible, unlike rent payments.
Mortgage payments build your equity in the home, so a portion of your monthly payments will be building future wealth.
If you choose your home and mortgage wisely, your monthly payments will fit comfortably within your monthly budget, and you don’t need to worry about increasing rent payments as the market grows.

Evaluate your financial situation to ensure buying a house makes sense
For many people, buying a home is the largest purchase they’ve ever made. So it’s vital to be sure your financial situation is healthy enough to support the costs. Begin by taking a look at your bank accounts and bills, and figure out how much you make per month versus how much you spend on bills and living expenses. If you’ll be buying a home with your spouse, you should look at their finances as well. Once you have a good idea of your financial situation, answer the following questions.

  • Do you have a reliable income, either from a job or your own business?
  • Do your finances allow you to save some money each month, or are you living paycheck to paycheck?
  • Do you generally pay down credit card balances quickly, or do you carry debt for a long time? Persistent high balances on revolving debt like credit cards will make qualifying for a mortgage more difficult.
  • Do you have a savings already set aside for emergencies? Generally it’s best to have at least 3 months of total household income saved to deal with unexpected expenses or income interruptions.
  • Do you have money saved for a down payment and closing costs? This should be separate from your emergency savings, because you don’t want to wipe out all of your savings on a down payment.

Figure out your down payment and closing costs
The down payment is the portion of the purchase price you’ll pay for a home up front at closing. A higher down payment means you have to have more money upfront, but it also means lower monthly payments, and can often get you a lower interest rate. Different mortgage programs have different down payment requirements. Conventional loans usually require at least 5%, and many require more – though some first-time homebuyer conventional loan programs go as low as 3%. Federal Housing Administration (FHA) loans require at least a 3.5% down payment.

In addition to the down payment, you’ll pay closing costs, the fees for processing and securing your mortgage. The purchase price and the type of mortgage will determine the exact closing costs, but typically they fall somewhere between 2% and 5% of the total purchase price.

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