Have you been thinking about buying a home? Are you ready to become a homeowner? In this article, I've answered some questions that you should ask yourself before buying a home. I want you to honestly ask yourself these questions before moving further down the trail to homeownership.
Becoming Homeowner Ready
- Are you financially ready? Home ownership shouldn't be taken lightly. Once you have a mortgage, your payments won't stop even if your income changes. You need to be able to make the mortgage payments regardless of what happens. Some people say that you should be prepared to have enough money to cover 6 months of expenses, I say more, like 2 years saved up or more.
- Do you have enough money saved up for the down payment and associated closing costs? Down payment can be as low as 3%, but there are other costs involved with purchasing a home as well. Usually you'll need to pay 1.3 years of home owners insurance up front, as well as escrow for property taxes as part of closing costs. Other items in the closing costs include title insurance, mortgage origination fees, appraisal fees, and broker fees, etc. Typical closing fees can range from 2.5% to 4%.
- Do you have enough reserves? When owning a home, things happen. A branch may break off in a storm and put a hole in the roof. A sewer line may back up flooding the basement. Hail storms can damage roofs. Bikes get stolen from garages. Some of these may be covered by homeowners insurance, but others may be too little to claim. You should avoid claims on home owners insurance if possible since that may lead to higher rates, and/or being dropped. You should count on having a reserve fund that is stocked with enough to do one major repair (say a furnace at $4000), and add funds to it every month. You can create a maintenance schedule and estimate costs and life of products. I'd start off with at least $100 per month into this repair fund just in case.
- Are you ready to be responsible? Things break. Faucets leak, toilets stop flushing, dishwashers overflow, outlets break... and more. When renting, these items would be the responsibility of the landlord. When you own your own home, they become your responsibility. There are many great resources that can help you fix your home. Fixing your home in the DYI fashion is great for 2 reasons: you get to know your home and how it is built, you can save tons of money in the process. If you are not comfortable fixing things yourself, be sure to find a handy-person that you can trust.
- Can you cover the cost of moving? Moving costs can range from very inexpensive (diy) to very expensive (moving cross country with a piano). The DIY solution is to rent a truck and have a moving party. Invite your friends to help and pay them in pizza and beer. This can cost less than $200 in total. Or it can be hiring movers, which can cost $1500 to $3000 or more depending on how much stuff you have to move, and how far you are moving. Also moving a piano means hiring a separate company that specializes in piano moving.
- Are you planning on staying in the same area for longer than 3-5 years? If you are thinking shorter term than 3-5 years, it may not be best to buy. There are significant costs to reselling a home and the economic outlook also can come into play here. Generally I say that one should live in their home for 5-7 years to come out ahead (again that still depends on the economy as a whole). This requires stability in knowing that your job is secure, and that you won't be changing jobs to across the town, or knowing that you have some sort of contingency in mind in the case of job loss or transfer.
- Are you credit worthy? Speak to a loan officer (contact me and I can put you in touch with some) and find out if your credit is good. If there are a couple of items that can be easily fixed, do so. A higher credit score allows you more choice in products, and a lower interest rate. It'll save you in the long run.