Maybe you're tired of throwing away money every month renting from "The Man". Maybe you've been living at home with your parents and you've accumulated some serious savings. Or maybe you want to make an investment outside of your 401k. Whatever your reason for wanting to know if buying a home is the right decision, consider the following:
Are you ready to take on the responsibility of owning a home?
Buying a home is a huge responsibility when compared to a lease. I like to think its similar to having a child (owning a home) or being the fun aunt (renting). When you're the fun aunt, you can spoil your nephew and give him back to his mom and dad to deal with the repercussions. When its your kid, you have to change all the dirty diapers. And just like buying a home, its a lot more difficult to get rid of your own kid!
- You are responsible for all maintenance and repairs, but that also means you are free to change/design/paint the house any way you would like
- You're responsible for all of the taxes and property costs, but you get to take advantage of the tax benefits associated with owning a home (To read more about the cost/benefits of owning a home visit: *)
Owning a home is an extremely rewarding experience, if you're ready. When it's your kid, you get to take pride in raising them and seeing all of their accomplishments. Eventually, you can be extremely proud when they grow up, move out, and become a successful adult. The same is true for owning a home that you eventually sell for a profit. Remember, as the fun aunt, you still spend a lot of money on your nephew. But at the end of the day, he's not your kid!
How long do you plan on living in the Charlotte area?
As a general rule of thumb, if you don't plan on staying in the area for more than two years, you might want to reconsider buying. Why two years? This is for a number of reasons:
- There are a number of costs associated with buying and selling a home. In order for an investment to make sense, you need these costs to be offset by an increased home value. (To read more and see examples; *)
- The government provides tax benefits to homeowners who live in their home for two years. (To read more; *)
Are you financially ready to buy a home?
It goes without saying, finances are the most important factor to consider when thinking about buying a home. With the help of a skilled real estate agent (that's me!) buying a house may be more affordable than you think. I believe that you should break down finances into three categories when it comes to buying a home. These categories are:
- Your ability to qualify for a mortgage.
- Credit Score- Traditionally, a higher credit score helps you to secure a mortgage and a better interest rate. But if your credit isn't perfect, don't fret! You may be surprised to know that in some cases it is possible to qualify with a credit score as low as 500. (*)
- Employment- Most lenders require two years of income history and verify your current source of income.
- Sufficient Income- This is typically referred to in the industry as "Debt-to-income ratio". In short, you take your reoccurring monthly debt (think average amount on your credit card statement, student loans, car loans, etc.) and divide it by your monthly gross (amount before taxes) income. This number is your monthly DTI ratio. It is possible in some cases to get approved with a DTI ratio up to 50%. (*)
- Down Payment- The amount of money you put down to buy a house may impact your ability to qualify for a mortgage. I go into more detail about down payments below.
- Your ability to pay for the initial cost of buying a home.
- Down Payment- This is one of the most misrepresented aspects of buying a home. It is a common misconception that you need at least 20% down in order to purchase a home. That is not necessarily the case. It is possible to put as little as 5%, 3% or even 0% in some instances! (*)
- Closing Costs- The down payment is not the only aspect of a loan that you are required to pay when you purchase a home. Closing costs associated with buying a home might include title policies, attorney fees, wire fees, loan origination fees, notary fees, recording fees, transfer taxes, and other costs. (These are explained in more detail here: *). These costs can be anywhere between 2-4% of the purchase price. It is possible that in some cases, an experienced real estate agent can help you reduce your amount of out-of-pocket closing costs.
- Pre-closing Costs- You read that right. There may be costs that you have to pay out of pocket prior to closing on your home. These might include paying for a home inspection, appraisal, and other miscellaneous expenses. (For a break-down of general costs associated with each step of buying a home; *).
- Other Costs- If you have never set up utilities in your name before, you may be required to put some money down or prepay for the month's costs. Don't forget about the costs associated with moving! You also should consider the amount that you are looking to spend on new furnishings and decor. (For a break-down of general costs associated with each step of buying a home; *).
- Your ability to pay for the ongoing costs of owning a home.
- Mortgage Payment- The biggest reoccurring cost of owning a home is the mortgage payment. This is the amount of principle (money you are paying toward your loan amount) and interest (money you are paying the lender to loan you money) you are paying each month. A number of different factors in your mortgage application and the economy impact the amount of interest you will pay on your loan. (See Mr. First Time's monthly cost calculator here: *).
- Mortgage Insurance- Most lenders require borrowers to pay for mortgage insurance anytime they put down less than 20% on a home and some loan types require all first-time home buyers to pay for mortgage insurance. This insurance is used to protect the lender in the case that you stop making your monthly payments. This can be a significant monthly cost and it is important to understand how this impacts your monthly payment. (To read more: *).
- Taxes- Typically, lenders require that first time home buyers have their property taxes escrowed into their monthly payments. This essentially means that the lender calculates the amount of property taxes you will owe (the government has their hands in every cookie jar) in a given year, divides it by 12, and adds this amount to your monthly payment. They then hold this money is a special account before ultimately using it to pay your property taxes for you once they are due. Keep in mind, this amount could change if the area you live decides to increase taxes or reassess the value they assign to your home. (*)
- Homeowners Association Fees- These are more commonly referred to as HOA fees. HOA fees are typically associate with condos and town-homes, but depending on your neighborhood they might also be assess to a stand-alone house. HOA fees usually cover community costs, such as pool maintenance or garbage removal. These fees, and what they cover, vary drastically between communities. HOA fees can add a significant amount ($50-$400+) to your monthly cost.
- Up-keep and Maintenance- No more calling maintenance to come fix a leaky faucet or replace a broken doorknob. Depending on the age of the home you are buying, maintenance cost may be virtually zero, or thousands every year. It is important to have an emergency fund for when your washer goes out and you need a new one.
There is a lot that goes into buying your first home. It can be scary if you don't have someone with knowledge that you can talk to about the process. Having someone who is knowledgeable about the process is extremely vital to helping you determine if buying is the right option for you. Mr. First Time specializes in just that!
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