While the dream of home ownership may have taken a beating during the recent recession, a majority of Americans still say that buying a house is in their life plan.
And with good reason: home ownership is a key part of many individuals’ long-term financial strategies, plays an important role in improving the health of the economy, and can provide much-needed space for growing families.
But if the recent collapse of the housing market made one thing clear, it’s that home ownership is not for everyone. It’s a significant, long-term commitment that requires strong financial standing and the right timing.
We spoke with Merrill Edge Financial Solutions Advisor Wesley Gunter and Trulia real estate expert Michael Corbett to get a sense of what first-time home buyers should consider before taking on a mortgage. They recommend that prospective buyers ask themselves the following questions:
1. Why do you want to purchase a home?
Both Gunter and Corbett say that figuring out why you want a home is absolutely critical before you begin looking at options. “What’s the purpose of the home?” asks Gunter. “What do you want to do with it? Are you going to live in it? Are you going to rent it? Know where you are in that life cycle.” Answering those questions will determine what kind of loan structure you’ll need and what size house makes the most sense given your short- and long-term family plans.
2. What can you reasonably afford?
Before you even think about whether you want a two- or three-bedroom, you need to figure out what you can actually afford. That means taking an inventory of your income, expenses, assets, savings, and debts. Once you know where you stand, Gunter suggests sitting down with a financial advisor and saying: “Here’s an example of our cash flow on a monthly and quarterly basis. Is it reasonable for us to buy a $500,000 home or a $200,000 home?”
The last thing you want is get your sights set on one kind of home only to discover later that it’s way outside your price range.
3. Have you factored in all the hidden costs?
The mortgage and down payment aren’t the only numbers you need to consider. “You hear people say all the time: ‘Well, my rent right now is $2,500 and the mortgage would be $2,300. I should buy a house,'” Corbett says. “Well, the problem is, you’re not taking into consideration all the ongoing costs of home ownership.”
Costs like property taxes, home owner’s insurance, realtor fees, closing fees, utilities, and maintenance can really add up. If you’re buying in areas like California, Corbett continues, you’ll also have to pay hazard insurance against natural disasters like earthquakes. “So that $2,300 is not $2,300,” he says. “It may end up being $3,500 or $3,700 when all is said and done.”
4. What kinds of loans do you qualify for?
Just like applying for a credit card, whether you qualify for a particular home loan depends on your financial history. Lenders will look at your pay stubs, employment forms, and tax returns going back two years, as well as your credit score to determine eligibility. First-time homebuyers can apply for Federal Housing Administration (FHA) loans, which require just a 3.5% down payment.
But if you can’t put down 20%, says Corbett, you should seriously think through whether you can afford a house. In the latest housing crisis, he says, “the majority of the collapsed mortgages and a majority of the defaults were homes that were purchased with very little money down.” Gunter agrees, saying: “Every mortgage is set up differently, but the more you can afford to put down the better, because it will reduce your payments as you get going.” More here.