It’s a part of the American dream, rates are low, there are plenty of houses to choose from, and it’s a buyers market so is this the perfect time for YOU to buy a house? Well, it depends because rates and availability are not the only things to consider when buying a house. Here are four other factors to consider before taking the plunge:
- Do you know the ‘true’ cost of home ownership and how much house you can afford? In addition to your mortgage (principle and interest) you must also pay taxes and insurance. And depending on the area you choose to live in, these can add hundreds of dollars to your payment each month. Then there is maintenance. This is often not factored in but it is real. When you own a home something is always going to need ‘fixin’. And don’t forget to add in dollars for a new lawn mower or a lawn service, higher utility bills, more furniture, etc. In fact, some studies show that when you factor in all of the costs, in many cases even with the deductions you get for owning a home, it is still actually cheaper to rent and you don’t have all of the responsibilities that come with home ownership.
- Is your career stable and do you plan to stay in the area for at least five years? This economy has made a lot of things unpredictable, including jobs. If there is a good possibility that you could lose your job or that your hours could be cut, you may want to wait until things are more stable. Also, if you are still moving up in your career and there is a possibility that you will need to move away to move up, you might want to wait. As I mentioned earlier, this is a buyers market which means that it is often tough to sell a house quickly at a reasonable price and this could make it difficult to move on short notice especially if you have lived there less than five years. Unlike a lease that often has an out clause, mortgages don’t have those, so until you are able to sell your house, you could be stuck with payments in your old and new location.
- Do you have some money set aside for a down payment and a cash cushion? Gone are the days when you could get a 100% loan. You will now need to bring money to the table (at least 5% of the loan and 20% is even better because it means that you will not have to mortgage insurance on top of all of your other costs). And, in addition, lenders also want to see that you have a cash cushion or other investments that could tide you over if an emergency should occur.
- How is your credit score and your debt-to-income ratio? Like the amount of money you need to get a loan, the bar has also been raised when it comes to credit scores. Lenders are now demanding scores of 700+ and debt-to-income ratios of less than 40%. If you haven’t checked your credit reports lately, do so before applying for a loan so that you can see what your prospective lenders will see just in case there are errors that need to be corrected. Having a credit score below 700 could either translate into higher rates on your loan which could add thousands of dollars to your payments each year or even being turned down for a loan. Free credit reports are available at www.annualcreditreport.com. Note you have to pay to get your credit score. Your debt-to-income ratio indicates the percent of your income that goes toward paying all recurring debt payments, including housing, credit cards, car payments, student loans, child support, alimony, etc. In general, lenders typically look for a ratio of 36% or less. So calculate yours to see how close you are to the recommended percent. Like low credit scores, a high debt-to-income ratio could result in being turn down for a loan.