Is It Time for You to Buy a Home?
Buying a home is a major financial decision, which means you'll want to do plenty of research, saving, and preparation before taking the plunge.
You’ll have to make some big decisions during your life. Two of the biggest decisions will likely be what career you choose to pursue, if any, and whether and when you plan to have children.
Those two choices will have a huge impact on almost every other aspect of your life, like deciding whether or not to buy a house. Coincidentally, deciding whether it’s time to buy a house is what this article is about. Wow, how convenient!
Whether you need a new place to live now or are anticipating needing a new place to live in the future, you may start wondering whether it’s time to buy a house. And if you are wondering, you’ve come to the right place.
If you aren’t, consider reading the article anyway. You wouldn’t want our hard work and the thoughtful insights from our contributors to go to waste, would you?
How long would you be staying there?
You can’t plan every aspect of your life. You might think you’re going to live in one home or even one city or even one country for the rest of your life, but life can change suddenly. Still, you’re going to want to be pretty certain about to settling down before you consider buying a house.
“My number one piece of advice is to consider how long you are likely to stay in the property,” recommended James McGrath, co-founder of the NYC real estate brokerage Yoreevo. “If there’s a decent chance it’s going to be less than five years, they shouldn’t buy.
“The first reason is between the search and actually executing the transaction, buying is a long process. But that’s only half of it. When the time comes to sell, you have to go through it all over again. Like all other costs, the longer you stay in the property, the less significant they become.
“That leads to the second and more important reason which is the actual transaction costs. While every market will be different due to local taxes and other costs, in NYC, most owners will pay a total of around 10 percent to buy and then sell a property. That’s a huge amount of money and if you don’t give the property enough time to appreciate you’ll lose money, even if it appreciates slightly.
“Also related to this: One of the biggest benefits of owning a home is the ability to exclude capital gains on the sale of your primary residence. The longer you own your home, the more likely it is and the more you will take advantage of that.”
Are your finances in a good place?
You might have to get your financial house in order before you look into buying an actual home. And while that won’t necessarily be a fun or a quick process, it may be a necessary one.
“Do you have your finances in order?” asked Ali Wenzke. “Check your FICO score and consider the stability of your job or other income streams. Budget 20 percent for your down payment plus additional money for closing costs, home inspections, and attorney fees.
“Also, realize that owning and maintaining a home can be expensive, so budget for property taxes, utilities, and general maintenance costs.”
Can you qualify for a mortgage?
Even if your finances are manageable month to month, if you can’t qualify for a mortgage and afford the accompanying costs, it’s not the time to get a house.
“All other analysis regarding the feasibility of a property purchase is truly futile until a person has been pre-qualified for the acceptance of a mortgage,” warned Ron Humes, VP of Operations Southeast Region for Post Modern Marketing.
“The lender will review a prospect’s credit scores, debt to earning (DTE) income ratios, and financial portfolio to determine if they are a good risk for a loan and how much they may borrow. This should be the very first consideration in the thought process, and no other time should be spent until they know they can qualify for a purchase if they choose.
“The next important consideration in the decision for a purchase is the minimal capital needed to complete the transaction. The money needed for the down payment to secure a mortgage is three percent to five percent depending on the loan type.
“There is a VA product available to veterans that still allows no down payment, but one must also consider the closing costs and prepaid items. The prepaid items are the taxes and insurance that will be collected at the closing. The closing costs are the fees charged by the lender, appraiser, and the closing attorney in the processing and completion of the loan.
“There are strict rules as to the source of the funding for the purchase, so the prospect should ensure that their source of funds will be acceptable to the lender before proceeding.”
Are you willing to take a practice run?
Even if you can get approved for a mortgage and you think your finances are in order, it won’t hurt to make a virtual attempt.
“If you think you’re ready to buy a home, or if you want to get ready to buy a home, you need to do a financial test-run,” suggested Certified Financial Education Instructor Amanda L. Grossman. “Figure out how much your monthly home expenses are going to be (for your dream home, then for a less-than dream home).
“This needs to include costs like your mortgage payment, your homeowner’s insurance, property taxes (divided out by 12 months), and maintenance costs (industry estimates are one to three percent of your home’s total cost, each year, spent in repairs/maintenance).
“Once you come up with a number, open up a savings account specifically for the purpose of doing your financial test-run. Then, each month for at least three months, ‘pay’ that amount of money into that savings account.
“How does it feel to make that payment each month? Do you still have cash flow left to pay your other bills, and to live a little? Or do you feel financial strain? This will help you both in figuring out if you’re ready to buy a home, and in helping you save up for the down payment. Which is a win-win scenario.”
Is there a better option available?
Sometimes it just might make more sense to continue renting for the time being, rather than jumping into home ownership.
“There are many factors that must be considered in the true cost of renting vs. owning,” explained Humes. “If we want to cut right to the chase, there is an easy way to understand this. No investor is going to purchase a property and rent it to another party without a built-in profit after all costs and expenses are paid.
“If an investor purchases a property and the total monthly payment for principal, interest, taxes, insurance, maintenance and management costs are $800 per month, the investor cannot lease that property for $800 per month because they have to calculate in a return on their invested money and a profit margin.
“The investor may lease this property for $1,100 per month with the tenant paying all utilities and the investor retaining the mortgage interest deduction (MID) write-off on their taxes. In addition, an investor will have to pay, and pass along to the tenant, a higher interest rate on the mortgage since it is considered a non-owner-occupied property and mortgage product.
“Therefore, in our example, the tenant could have purchased the same property for perhaps $600 per month instead of $1,100 per month and retained the MID tax write-off for themselves. The person considering a purchase over lease still needs to consider if they have the time to oversee the maintenance on the property.”
When you decide it’s time …
OK, you’ve taken all the above factors into account. Now it’s time to find the house you want to purchase. So … how do you go about that?
“After getting pre-approved for a mortgage, it’s time to look for a home you’ll love!” advised Luke Babich, CSO of Clever. “Make a list of variables you value: neighborhood safety, access to parks, proximity to entertainment, school district, the availability of public transportation, and rank how important each of these factors is to your home selection process.
“While it is possible to buy a home without an agent, finding a real estate agent you trust can really help you find a home that meets your standards, as agents have invaluable experience and knowledge of local markets. Go to plenty of open houses to scout out the area, get a feel for what’s on the market, and communicate your thoughts with your agent.”
And if it isn’t time …
Don’t get discouraged if it isn’t the time to buy a home yet. You can still begin preparing for when the time comes.
“If you are not in a place to buy a home just yet but know it is something you want soon, review your finances and make adjustments to start saving up,” recommended Jared Weitz, CEO and Founder of United Capital Source Inc. “Cut spending in certain areas, pick up a side hustle or move into a smaller place to rent and then allocate that money towards your down payment and investments.”
And preparing isn’t just about the serious business and money aspect.
“Begin making your dream home wish list,” advised Wenzke. “Would you love to live in a certain neighborhood or have an open floor plan or a gourmet kitchen? Once you have some ideas, use that list to find the perfect rental for you. You can test out your dreams before making a long-term financial commitment.”
Buying a home may be a big decision, but taking the necessary steps and time to figure out what makes sense for you will allow that decision to be more manageable. If you do get around to buying a home, drop us a line and we’ll bring you a nice housewarming meal!
Luke Babich is the Co-Founder and CSO of Clever (@ListWithClever), the free online service that connects you with top Real Estate Agents who can help you save on commission. Luke is also an active real estate investor with 22 units in St. Louis and a licensed Real Estate Agent in the State of Missouri.
Amanda L. Grossman (@FrugalConfess) is a Certified Financial Education Instructor at Frugal Confessions, where she helps Chief Family Officers (CFOs) control their finances so that they can save money to live their life by design. She’s a featured blogger at the Houston Chronicle, and winner of a 2017 Plutus Foundation grant to create the Mt. Everest Money Simulation: A Kid’s Money Educational Adventure.
Ron Humes is currently the VP of Operations Southeast Region for Post Modern Marketing (@PostMM); a full-service digital marketing company. He has been a realtor as well as an owner and principal broker of his own realty company for 20 years. He has been a custom home builder and owner of a remodeling company. He is an active investment property owner of flips and rentals. He has been a Property Manager for 20 years. He trains investors to purchase, flip and rent properties.
Jared Weitz (@jaredweitz) has been in the financial services industry for over 10 years. Due to his extensive work experience and deep network of close financial relationships, he handles a multitude of different finance options for his clients and contacts. Over the years, he has held positions in some of the largest business financing companies in the U.S. Some of his roles have been: Underwriter, Director of Business Development, Managing Partner and currently, CEO of United Capital Source, LLC.
Ali Wenzke (@AliWenzke), Moving Expert, moved 10 times in 11 years. Now she’s helping the millions of people who move each year by providing practical tips on how to make moving a happy experience at The Art of Happy Moving. After calling seven U.S. states home, Ali is now happily settled in the Chicago suburbs with her husband and three children. She doesn’t plan on moving anytime soon.
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