What it really comes down to though is if you’re ready to buy a home or not. Well, below are a list of questions to ask yourself whether you are buying your very first home or you’re a real estate veteran.
How much cash do you have?
Money is obviously at the forefront of any major purchase but it even more so when it comes to real estate. I usually hate using clichés but “do you have champagne tastes and a beer budget”? I think we all know that over-extending ourselves can lead to losing your house, credit, and many years of hard work.
Budgeting is key, of course, and knowing what number you have to stay under and doing it is a must. Since there are so many costs that are involved in buying a home, you have to make sure that you consider them all before sitting at the closing table. Here are some possible costs that are involved when you buy a home that you won’t see when renting:
Down payment – usually 3%-20% of the sales price.
Earnest money deposit – no standard amount, but ask your Realtor. Make sure you understand the difference between an earnest money deposit and a down payment. Both earnest money and down payments need to be from verifiable sources.
Closing costs – could be anywhere from 0$ to 4% of the sales price.
Appraisal – several hundred dollars.
Home inspection – several hundred dollars. The cost is one of the frequently asked home inspection questions.
Pest inspection – a couple of hundred dollars.
While you may be able to qualify for a low or no down payment and you can negotiate with the seller to pay for closing costs (depending on your market), you’re going to need some cash.
How’s your credit score?
You don’t need to have spotless credit in order to buy a house but the better it is, the better your rate. The better rate that you have, the lower your monthly payment. Did you know that even a ¼% difference in your interest rate could relate to around $100 more in your pocket?
There are many articles written about how to improve your score and how your credit score can affect your buying power. Do some additional research. Dispute any discrepancies. Get on a credit monitoring program like Credit Karma or Credit Sesame. The more you know about your personal credit score, the more you are putting yourself into a position to pay less for your mortgage loan.
Here’s a quick tip for obtaining a higher score – have a strong amount of credit available to you (like through credit cards) but have a low utilization rate.
For instance, if you have $5,000 worth of credit through several cards and only have a balance of 5% of the limit, that’s strong. Credit pros say to keep your utilization under 30% but 0% is better of course. Get my drift?
How much debt do you have?
Obviously, the less debt that you have, the better, but in order to buy a house, lenders usually go by a certain ratio, which is typically 28:36. The front end ratio of 28% covers just expenses that have to do with home expenses. The back end ratio of 36% includes all of your monthly expenses.
Your Debt to Income Ratio is calculated by taking all of your monthly debt payments and dividing it by your gross monthly income. While 36% is ideal, lenders do consider your DTI up to 43%.
The bottom line is the lender wants to know that your debt is at a manageable level, so they don’t lose their investment in you.
Here are ways to lower your Debt to Income Ratio:
Get a part-time job
Ask for a raise at your current job
Pay extra on your credit cards
Save money to pay down your credit cards by reducing your day-to-day expenses
Can I re-sale this home without too much trouble in the future?
Very few homeowners are currently in their “forever home,” so considering how hard it will be to re-sale down the road is something to think about. Just like you would do when staging your home to sell, you have to put your self in the shoes of the masses.
Would most people have a problem with:
Traffic concerns near your neighborhood. The type of road you live on effects the market value!
A shopping center or school behind your property
The freeway being a couple of streets from your house
Powerlines running beside your land
Your property has an inground pool
Being in a poor school district
Being located in a rural area
Being located in a very populated area
Yes, location can affect the resale of your home. These are just a few factors to consider, and they are not all necessarily good or bad. Always keep in mind, if you have to sell in several years, how well would the property you’re considering buying stack up against other homes that could be on the market?
How long will I be living in the home?
No one has a working crystal ball, but this question to ask yourself is essential. In most real estate markets around the country, you’ll need to stay in a property at least 3-5 years in order to gain enough home appreciation not to lose money when you sell.
In my market in lower Alabama, home appreciation has been a solid 2%-3% a year for the past decade or so. This is good steady growth, but you still need to hang in there long enough for it to pay off.
For instance, if your job has you moving all over the country from time to time, you may need to consider renting. The first question above talked about needing cash to buy a home. Well, you’ll want to at least recoup that amount then ideally make enough on the sale to pay for your next home. To allow home appreciation to work in your favor, you need to give it plenty of time.
There are many steps to buying a house, but by asking these critical questions, you’ll always be more prepared and in a position to win.
Other Valuable Huliq Real Estate Resources
Where to get a mortgage to buy rental property - are you considering purchasing a rental property as an investment? Are you not sure where you should get your financing? See some helpful advice on sources for rental investment property loans.
Can you buy a home with contingencies - Is is possible that a contingent home can still be purchased? The answer is yes, it can. See how it's possible that a home marked contingent could become available again.
Use these additional resources to make smart home-buying decisions with your next purchase.
About the Author: The above article on questions to ask when buying a home was written by Jeff Nelson. Jeff has been selling homes and resort condos for 14 years and works in the areas of Baldwin County and Mobile, including Orange Beach, Gulf Shores, Fairhope, Daphne, and Fairhope.