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Buying a home is one of the most important financial decision that you'll ever make. It's lot more than just a financial transaction and you want to make sure you purchase something that you and your family can not only enjoy for years to come but also feel proud. Sometimes people make home buying decisions in a hurry - either they think they are getting a great deal or can't resist a home market that is appreciating at 10% or even 20% a year. This article is meant to help you get started with the basic concept of home ownership and what it takes to buy your first home. This piece of information is by no mean exhaustive but this quick reference guide is designed to be a starter kit for most answers to your home buying doubts and questions.
So let's get started. This article is written in the form of 9 critical items that you should consider before purchasing a home. Read through each and give yourself a score of 10 if you feel that you're comfortable with the question and answer in affirmative.
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Do you have a stable job and expect to stay in your current job for at least next three years?
IF your answer is "YES", give yourself 10 points. On a cursory look, this question may not sound important or even relevant to home buying but we will explain in a minutes why this is important. Remember, if you're not comfortable with your current job and feel that you may be leaving in next 2-3 years, then you have to consider the options. Can you find a decent comparable job in the same city or within reasonable driving distance? If yes, then great, but if you have even a small doubt that you may not, then we got a problem. First of all, if you can't find a job nearby, you will have to move out of your current geographic area and that usually mean selling your current residence as well. So if you can imagine a real possibility of selling you home in next three year, you should carefully consider your home purchasing since it is unlikely that you'll make any money in three years. On top of that, you may find yourself in big trouble in real estate markets turn south. |
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Do you expect a sizeable expense in next two years such as starting a business, medical bill, having kids, or purchasing new vehicle?
If your answer is "NO", you are good and give yourself 10 points for this question. However, if you're not sure of the answer, then sit down and try to come up with a more definite answer before starting your house hunting trips. It's is critical that you must be able to pay your mortgage payments once you purchase a home. If you miss out on your payments, you're not only going to lose your down payment on the house due to foreclosure, you're also going to destroy your credit rating and that would cost you thousands in years to come. |
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Do you know how much monthly payment you can afford to pay in mortgage payment, insurance and taxes?
If your answer is "YES", you have done your homework and you have a clear understanding of what it takes to be a homeowner. points for this question. However, if you're not sure of the answer, then sit down and try to come up with a more definite answer before starting your house hunting trips. It's is critical that you must be able to pay your mortgage payments once you purchase a home. Also, if you're renting at present, figure out how much extra it is going to cost to own a home on a monthly basis. If you're monthly mortgage payment is 150% or more than your existing rent payment, you should reconsider the purchase price of your home. |
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Do you know your credit score and what is on your credit report?
If your answer is "YES", give yourself 10 more points. Your credit score is one of the most important factors in dictating the interest rate on your loan. You will be surprised to know that a 200 point swing in credit score can result in as much as 2 percent point on your final interest rate. That's almost $4,000/year on a $200,000 home. If you have a spouse or significant other applying for this loan with you, make sure you find out their score as well since lender usually use the lowest of the two scores in case of couples. If your credit is bad, you can still own a home but the possibility of getting a great rate is almost nonexistent and you'll have to put down a higher percentage as a down payment. |
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Have you saved money for down payment and closing costs?
Mortgage lenders play all kinds of tricks. Remember, they will charge you for everything, even for photocopies of document and probably at a rate of 50 cent per copy while you can get them anywhere for less than 5 cents. Bottom line is that there is a significant amount of money that you must come up before you can purchase or close your new home. All costs related to home purchasing are usually lumped together in " closing costs" and could sometimes be as much as 5% of the home price itself.
Having a good understanding of closing costs will help you eliminate surprises and extra time to prepare and arrange for this money. You can also do a better job comparing different lenders if you can interpret their closing cost structure. Remember, lender with lowest mortgage rate may not be the one with the best deal for you in the end. Closing costs should be taken in account before making a final decision on a mortgage loan. |
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Are you pre-approved/pre-qualified for a home mortgage loan?
If your answer is "YES", you have completed one of the most important steps in purchasing a home. Too many people miss out on a great home deals because they don't have loan approved at the time or get declined a home loan. Having your loan pre-approved also offers you an advantage during price negotiations and seller is often more willing to work with a buyer who can close a deal quickly. A pre-approved loan is better than a pre-qualified because you know that you can get a loan without going through extra hoops for approval. Having a pre-approved loan also gives you a good understanding of your price range since you know beforehand how much you can get from your lender. This keeps you focused in your search and save time by only seeing homes that you could afford. You should give yourself 10 more points if you have a pre-approved mortgage loan. |
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Is your monthly debt load)exclusive potential home mortgage payment) is below 28% of your monthly income?
If your answer is "YES", you are in good shape and should award yourself another 10 points. Most people don't understand why 28% debt to income ratio is so important. Can't you afford a home even with a debt to income ratio of 40%? Answer depends on your income and situation. Remember 28% is not something caste in stone, it is just a guideline that is time tested by lenders. You have much higher chance of defaulting on your loan if your debt to income ration is over 30% and that's why lenders pay close attention to this number. |
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Have you researched the neighborhood and the areas you're interested in buying a home?
If your answer is "YES", you get another 10 points. Having a clear understanding of the area and housing market is a big factor is successful house hunting. You just can't look all over the town and hope to find something that meets all your requirements. finding an area with good schools and low crime is important to keep your home appreciating at a good rate as well as providing a safe environment for your family. Pay close attention to public transportation route and schools when looking for a home even if you don't have children or don't take bus to work. These factors are critical in the resale value of your home and even if you plan to live in your home forever, you should always consider a resale in your purchasing plans. |
Based on these eight questions, if your score is 60 point or higher, you're well prepared to purchase your new home. However, if your score is low, you must address some of the concerns raised in these questions. Remember, buying a home is far more than a financial transaction and you want to make sure that you are getting the value for your money.
Buying a home has been a difficult process, and it is even more difficult more than ever before - and if you're not careful, your dream of owning a home can easily become a nightmare. Therefore, make sure you find the right people for the job, whether it is a loan officer or a real estate agent. You should be very carefully when seeking advice about buying a home, for asking the wrong people can cost you a ton of money.
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