For some people, the idea of renting is better than the idea of buying. It may be about the freedom that comes from not having to take care of the house yourself or being able to leave with just 30 days of notice first.
Another positive is the financial aspect. For those who want to live in a desirable area such as a major city or a great school district it may be less expensive to rent than to buy. Or there may not be any options to buy within that specific area.
On the other hand, there are many different reasons someone might decide to purchase a house. For one thing, even if the value of your place goes down, you’re still going to have a home. Plus, once you pay off that mortgage you never have to worry about making payments again. The place is yours.
For a lot of couples, the idea of buying a house seems overwhelming, but it doesn’t actually have to be as complicated or as daunting as you may think.
You just have to make sure you understand the responsibilities that are tied in with that decision. It’s going to be an exciting opportunity, and maybe a little bit nerve-wracking at the same time. Also, it's advisable to get prepared for this step and make sure you are informed with all the relevant info. Fortunately, there are many online guides for first time homebuyers you can read for free (here's a great one).
Are you ready to buy a house?
1. You Can Pay For The Down Payment And Even More
Far too many people think that they should take money out of their IRA or 401(k) to pay for a down payment. The problem is that it’s extremely expensive to do this. Sure, you’re getting something of value for your money, but you’re losing money from your retirement. And you’re losing free money that you earned through compound interest. Not to mention you have to pay that money back again.
Things like closing costs, inspection fees, title insurance, and more are expensive. And they could eat up to 5% more than the down payment.
Not only that but the first time you buy a house you could be tempted beyond what your budget actually was. If that’s the case you end up spending a whole lot more than you might think. That means when you start saving for a down payment you should always have more than you think you’ll need.
2. You Plan To Stay In The Area For At Least 3 Years
The idea behind this one is that if you’re staying in one place for at least three years you’ll spend less to buy a house and pay on the mortgage than you will to rent month by month. Now, this doesn’t always hold true and you’ll have to compare the area where you’re going to buy versus where you’ll rent and the costs in your area to be sure. The longer you’re staying the more feasible it is to buy instead of rent.
Even more, if you try to sell your house before that three years are up you’ll likely lose money on the sale rather than make money or even break even. Not to mention you could be stuck with a lot of taxes.
The IRS charges capital gains taxes if you profit over $500,000 on the sale of a home as a married person or $250,000 if you’re single.
If you try to file an exemption from this you need to show you’ve lived in that particular place for at least 2 years over the course of the last 5 years.
If you can’t prove that you’ll be paying a whole lot more in taxes. So make sure you’re talking with a tax attorney or accountant to help you make the right decision.
3. You Know What Type Of Mortgage To Get
If you’ve spent any time looking into mortgages you likely already know that there are plenty out there. Each one has a different interest rate. They all offer different fees and payment processes. Overall, these different factors are going to impact just how much you’re going to pay and for how long. You want to make sure that you’re looking at each of the different types before you make a decision.
Keep in mind that you need to know what your finances look like, what your options are and who you’re going to work with.
All of these things need to be looked at more carefully the closer you get to actually buying a house. If you’ve already done the research and you know the best loan for your situation you’re definitely in better shape overall.
4. You Know How Much Mortgage You Can Afford
The problem with mortgages is that some people think they can afford more than they can because of the way they’re structured. Also, they make the mistake of thinking that the monthly payment is all they need. That monthly payment could be the same or less than what you pay in rent. But you’ll need to factor in other expenses as well.
A good rule of thumb is to get a mortgage that’s only 2 – 2.5 times your gross income or the amount that you earn before taxes each year.
So, if you make $100,000 you could get a mortgage of up to $250,000. But keep in mind that you have to be able to make those payments and pay for all of the other things you need or want. If you get too large of a mortgage you could end up in more trouble than you think.
Pay attention to your budget and your expenses. Getting a mortgage with payments that are no more than 25% of what you actually take home each month is probably the best way. That will help you make the payments without falling into the debt spiral or getting in over your head. Just keep in mind that your lender will likely offer you more than that, but that doesn’t mean it’s a good idea to take it.
5. You Have A Great Credit Score
When it comes to getting any type of loan the lender is going to look at your credit score and they will use that to make a lot of decisions. First, they’ll decide if you’re even going to get the loan. Then, they’ll decide on the specific terms, like the interest rate.
If you have a bad score you could end up with higher interest, which means higher payments, which could mean a little more strain on your budget.
Just make sure that you take the time to check out your score before you start applying for loans in the first place.
Your credit score is going to give the bank or any other lender an idea of s. If you have a good credit score they assume you’ll pay back the money they gave you. If you don’t, you could be a risk. And not having a good score could be higher than you think.
6. You Are Comfortable Doing Your Own Maintenance
When you live in an apartment or condo someone else is responsible for the maintenance. When you own your own home, however, you’re going to be responsible for all of the maintenance. You’ll need to mow the lawn, fix leaks, do any painting or drywall repairs, and any other tasks that you would normally call your landlord about. You can hire someone to take care of these things, but you’re going to have to do at least some of them for yourself, which can be difficult for some. Not to mention the ones that you don’t know how to do you’ll have to have money to pay for.
If you’re okay with these types of requirements then you should be just fine to own your own home. Just make sure you save 1-3% of the cost of your home to pay for potential repairs each year.
7. Your Job Is Secure
You don’t want to buy a house if you don’t have a steady income. That means you need a secure job that’s not likely to disappear on you. After all, you need to be able to make the payments. Unfortunately, many Americans lost their job recently due to Pandemic.
If you pay attention to the payments that you have to make as well as the extras that you’re going to have with your mortgage payment you should be able to figure out how you can make it work with your job.
If you’ve just started out in your career and you’re moving up then you may be set to buy a house. If you’re just getting into working and you don’t have very good security in your job, however, this might not be quite the right time.
8. You’ve Got Your Debt Handled
Debt is a big aspect of what you can afford. If you have a lot of debt you may not be able to get your lender to agree to give you a mortgage. Or you may have trouble making the payments even if you do get that mortgage.
Having too high of a credit limit on cards, even if you’re not maxing them out or getting close, could also look bad to potential lenders.
You want to make sure that your debts are down enough that your income clearly covers those debts and the addition of a monthly mortgage payment. If that’s clear enough to your lender you’re going to be in good shape. On the other hand, you could find yourself with a difficult process of trying to get approved. Usually you want a maximum of 43% debt to income ratio. Having a lower number is going to set you up even better.
Make sure that you’re not going to be breaking the bank or your budget trying to pay for a house. Instead, you need to be able to make all of your debt payments, your new mortgage payment and pay for anything else you need, or you’re never going to be comfortable.