Your parents did it. Your friends are doing it. But how do
you know if you’re ready to buy a home? The decision to become a homeowner is a
personal one that must be based on your life situation and finances. Ask
yourself these six questions to determine if you’re real estate-ready.
1. Can I afford it?
Homeownership brings with it many new expenses. Beyond your
mortgage, you’ll be paying for insurance, utilities and taxes (which is
included in MOST mortgages), not to mention maintenance costs and perhaps
homeowner’s association fees. If you don’t already have a budget, start one. It
will help you manage your money, your spending and help you understand how much
you can afford for a home. If you are currently renting the key is to not have
a mortgage higher or at the max of your budget.
2. Do I have money for a down payment?
Most lenders require a down payment of 3.5 percent up to
20 percent of the home’s price. The U.S. Census Bureau reports the median
price of new homes sold in March 2014 was $290,000; 20 percent of that amount
is $58,000. Less than 20 percent down will require that you take out private
mortgage insurance (PMI), which protects the lender against default. PMI rates
vary, but monthly premiums can range from $30 to $70 for every $100,000
borrowed. VA loans, available to consumers who have served or are
presently serving in the U.S. military, require no down payment. Additionally,
low-income borrowers with credit scores of at least 580 may qualify for an FHA
loan (insured by the Federal Housing Administration) with a down payment of 3.5
percent.
3. Do I have a reliable source of income?
If there are murmurs of layoffs at your company or you’re
thinking you might want to quit your job, where will your mortgage payment come
from? Make sure you have a steady source of income.
4. How’s my credit?
Everyone has a credit score, also known as a FICO score
(Fair Isaac & Company), which can range from 300 to 850. If your credit
score is below 620, you’ll likely have a tough time getting a loan. If you do
obtain a loan, it will probably require a higher down payment and a higher
interest rate. If your credit score isn’t great, you should take some time to repair
your credit and raise your credit score. Do research before contacting a
credit repair company some of them aren’t worth the money.
5. Am I planning to stay put for the next three to five years?
Real estate transaction costs are high enough that, unless
you’re in a thriving real estate market, you’ll likely lose money if you don’t
stay in your home for at least three to five years. Research your breakeven
point, which is the amount of time that buying makes more sense than renting.
6. Am I ready for some DIY projects?
Owning a home means maintenance, such as mowing the lawn or
making minor repairs. Do you have the time, skills and interest to maintain the
property? Or, can you afford to hire someone to handle these tasks?
Summary
Once you have examined your financial health and decided you
are ready for homeownership, take the time to choose your advisers wisely and
enjoy the hunt. Don’t let a pushy friend, relative, or real estate agent force
you to make decisions. Take careful inventory of your own situation.
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