Deciding to buy a home is a huge decision, and signals the next chapter of your adult life. You give up the sometimes nomadic existence of an apartment-dweller, put down real roots, and settle down. It can be a big transition.
Before you rush in and start shopping for a colonial or craftsman, it’s important that you’re emotionally and financially ready to become a homeowner. It’s not a choice you want to make hastily.
Before buying a home, ask yourself these five questions.
1. Are you ready to settle in one spot?
When you rent, you have more flexibility. If you lose your job, if the area gets over-developed, or you simply want a change of scenery, you can simply move out at the end of your lease.
When you become a homeowner, things become more difficult when moving arises. You need to be able to sell your home — and break even, if not make a profit — which can take weeks or even months to do.
So before you put in an offer, make sure you’re comfortable staying in one place for several years. If you’re in a risky job situation, or if you’re not sure where you live right now is where you want to be, it might make more sense to hold off.
2. How much can you really afford?
Buying a new home can be expensive. According to HomeAdvisor, the average cost to build a new home is $286,735. However, your location could cause that number to skyrocket.
When you’re going through the home-buying process, you can likely qualify for a home loan that would be far more than you actually can afford. Many home loan calculators will tell you the absolute maximum you can afford rather than what you should borrow.
To be on the safe side, your new home should cost three times your income — or less. If you wanted to buy a new home at the average price of $286,735, that means you’d need an annual income of nearly $96,000. If you have other debt, such as student loan or credit cards, you should opt for a cheaper home to give yourself more wiggle room in your budget.
3. How much emergency savings do you have?
Coming up with a down payment and closing costs is hard enough, but you likely need a larger cash cushion as a homeowner. As a renter, you depend on your landlord to make repairs. But once you buy, you’re responsible for home maintenance and upkeep on your own. That likely means spending more to keep your home in good condition, which requires a larger emergency fund.
Before becoming a homeowner, work on bulking up your savings account. Try to have at least three to six months worth of expenses saved before making an offer on a home.
4. Do you have enough saved for a down payment?
Although you can get a mortgage with as little as 3.5%, you’ll pay the price for such a small down payment in the form of private mortgage insurance (PMI). PMI can add thousands to the cost if your mortgage over time.
Ideally, you should aim to put 20% down to avoid PMI and to decrease how much money you need to borrow. That will help you save money over time.
5. What is your credit score?
Your credit score plays a big role in the home buying process. It affects whether or not you can get a mortgage at all, and what interest rate you’ll ultimately pay on your home loan. If you’re not sure what your score, you can get your credit score for free.
If you have good to excellent credit, you have more power as a potential home buyer. Mortgage lenders will be more likely to compete for your business, and you can get the lowest possible interest rates and most favorable loan terms.
Buying A Home
Purchasing a home is a long-term investment that can significantly impact your future. It’s not a decision to rush into; you should carefully consider your current finances, lifestyle, future goals, and credit before moving forward.
If you decide that homeownership is right for you, you can shop online for a home loan and compare offers from multiple mortgage lenders.
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