Am I Ready to Buy a Home?
When is the right time to purchase a home? Buying a home is a huge financial decision and moment in your life. It’s the “American Dream” to own a home with a white picket fence, but it can also become an American nightmare if you are not prepared. There are three major expenses that go into buying and maintaining a home. Your on-going costs, closing costs and down payment. Your on-going costs are the monthly mortgage payments along with the taxes, insurance and maintenance cost of the home. Your down payment is the amount needed in order to get approved for a mortgage loan. Some loans require at least 3% of the purchase price. Finally your closing costs, the fees you have to pony up in order to get into the house which is usually around 2-3% of the home. Fees on top of fees, fees you’ve never even heard of before. Some of these fees are taken off of your plate depending on the type of lender but you most likely will have to set aside some cash just in case.
Like most young millennials, you’re probably not going to buy a home in cash. Some recommend you should put at least 20% of the home purchase price as a down payment to avoid PMI (Private Mortgage Insurance) payments. But honestly, depending on your city and current living expenses this may be a difficult task to do. I personally think banks don’t work in the best interest of the buyer. Just because you were approved for a certain amount does not mean you can afford it. The true cost of owning a home can be significantly higher than the mortgage. If you’re currently renting an apartment for $900 per month and think “Oh I can afford a mortgage for $850 a month” stop right there buddy.
The mortgage is just a portion of what it takes to own a home. Along with your mortgage payment, you will also have to pay property taxes. Property taxes are real estate taxes, local governments charge for public expenses. This tax can change annually due to inflation. Another monthly payment will be homeowners insurance, this covers major damage repairs and cost due to catastrophe or theft. In some areas, you’ll also need flood insurance. Then you have to think about utility bills, which are usually higher when you own a house. Additionally, some properties have an HOA(Homeowners associations) fees, this can range from as little as $50 per month to as high as $400. HOAs charge fees to maintain amenities and cover expenses within a housing community. Lastly, the cost to maintain the home. This is a major variable because some years your maintenance can be as little as mowing the lawn and doing chores while other years you may need to replace your water heater, refrigerator, washer, and dryer or even a roof.
Here’s a scenario of a $200k home with a 10% down payment and HOA fees.
You’re looking at a $800 mortgage that totals up to around $1360 with homeowners insurance, private mortgage insurance, property taxes and HOA fees. Then you have to pay your utility bills and factor in the monthly maintenance costs. That can easily add up to $1600+ per month to maintain this home. So how do you know if you’re ready to buy a home? Whatever your estimated mortgage loan payment is, add 30-50% to it per month. If your current budget can handle that payment month after month without leaving you in financial hardship, then I think that’s a great start.
Here are 5 steps I recommend
- 1.) Build an emergency savings with at least 3 months worth of expenses outside of your down payment. You “DO NOT” want to clear out all of your savings to purchase a home. That would be setting yourself up for failure.
- 2.) Make sure you’re building up your credit score and showing great credit worthiness. When you’re shopping for a mortgage, having good credit will make the process much easier and possibly save you thousands on interest.
- 3.) Visit the area during different times of the day. Research the city, here is a great website for city statistics city-data.com. Look up information about the crime rate, the population and demographic, the schooling and education systems if you plan on having children… etc.
- 4.) Evaluate your current financial situation. Pay off consumer debt before taking on a mortgage. Your debt-to-income ratio (monthly debt payments/monthly income) can decide whether or not you can handle a mortgage payment. Most lenders will allow you up to 36%-40% max with a mortgage included.
- 5.) Don’t rush!!! According to realtytrac.com default notices, scheduled auctions and bank repossessions were reported on 1,083,572 U.S. properties in 2015. I’m sure at one point these people qualified for loans for their properties also but emergencies happen and life kicks in. I want people to be well prepared so they can withstand these rough times.