Q: I’ve saved a down payment, narrowed my choices of neighborhoods, and drawn up a wish list of what I’m looking for in a home, but I’m getting cold feet. How do I know if I’m really ready to buy a house?
A: It’s perfectly normal to feel hesitant about going through with what may be the biggest purchase of your life. To help put you at ease and to make sure you’re really prepared for this purchase, we’ve compiled a list of questions to ask yourself before buying a new home.
» Can I afford to buy a house?
Before viewing properties, remember that purchasing a new home will cost more than just the down payment. Buyers also need to cover closing costs, which typically run at 2-4 percent of the total purchase, as well as moving costs, and possibly new furniture and renovations for their new home. You will also have to pay the hazard insurance premium and may have to pay pro-rated property taxes when you purchase the home.
» Can I afford the monthly mortgage payments?
Most lenders will grant a loan to a homebuyer if the monthly mortgage payments do not push the buyer’s debt-to-income (DTI) ratio above the recommended 43 percent. This means that the total monthly payments due on debt the buyer carries, including their mortgage, credit card, loan, and car payments, does not exceed 43 percent of their gross monthly income. You may want to work out the total for your pre-mortgage debt before applying for a loan so you have an idea of how much house you can afford.
When determining whether you can actually afford your monthly payments, though, remember that there’s more to homeownership than a monthly mortgage payment. Be sure to include calculations for taxes, insurance, and a possible increase in utility bills. Your mortgage lender should be able to provide some of these numbers for you.
At Clackamas, our mortgage team is very familiar with this calculation and can be a good resource in determining what you can afford. Click here to reach out.
» Am I ready to settle down?
The average length of time that homeowners in the U.S. live in a house is only seven years. Buyers who don’t plan on staying in their homes long-term may end up incurring a loss. Consider factors like your career, family planning, changing demographics of a neighborhood, and more when trying to answer this question. Experts advise buyers to only purchase homes they plan on living in for a minimum of five years.
» Does buying a house in my neighborhood make financial sense?
Many Americans view homeownership as a rite of passage into adulthood, but that doesn’t mean purchasing a home always makes financial sense. In some neighborhoods the cost of owning a home exceeds the cost to rent. In these neighborhoods, buying a home may not be the logical choice, even if the buyer can easily afford the purchase.
» Is my credit score high enough?
A fairly decent credit score is necessary to qualify for a home loan. Most lenders will only grant a home loan to borrowers with a credit score of 650 or higher. Some loan programs have a minimum rate as low as 580. A score that doesn’t make the cut can be increased by being careful about paying all bills on time, not opening new credit cards in the months leading up to the home loan application, paying credit card bills in full each month, and keeping credit utilization low.
» Do I have a plan in place for repairs?
When a renter has a leaky faucet, they call the landlord and the problem becomes theirs. When a homeowner has a leaky faucet, it’s their own problem. They can either fix it or hire someone to do the job, but it’s a good idea to have a plan in place before the first thing in a new home needs fixing. If you’re handy enough to handle repairs on your own, you’ll need to be ready and willing to give up some of your free time on weekends to tend to things around the house. Otherwise, it’s best to have a tidy sum put away to pay for necessary repairs before purchasing a home.
Sometimes, an appliance or a system in the house will be broken beyond repair and will need replacing. Homeowners need to have enough money stashed away in their emergency fund or rainy-day account to cover these purchases, too. A home warranty can take some fear out of surprise repairs. Having a home warranty may provide you with some peace of mind. But you should be wary of built-in wiggle room that can make it easier for them to deny payouts. It’s important to do your research and determine which option works for you.
Buying a first home is an exciting milestone that only happens once in a lifetime. If you think you’re ready to take this step, first make sure this purchase is the right choice for you at this time on a financial and practical level.
Clackamas Federal Credit Union is registered with the National Mortgage Licensing System (NMLS #709344).