I always knew I wanted to become a homeowner, so I bought a house as soon as I was able to do it. But, I was surprised at parts of the process, including how long it took to get a mortgage and how high closing costs were. Everything worked out eventually, but I wish I’d done more research beforehand.
The good news is you can learn from my mistakes and do your due diligence upfront. We’ve consulted experts to identify seven questions for you to answer before purchasing a home.
1. How does renting compare with the costs of buying?
Buying a home often is a good investment, but a lot depends on whether the costs of ownership are reasonable compared with the costs of renting in your area. “There are some markets where it would make more sense to own and some markets where it would make more sense to rent,” said real estate agent Nicole Durosko of Warburg Realty Partnership.
If buying a home would cost the same or less each month than it would to rent a comparable property, buying can be a smart financial choice — provided you’re prepared to become a homeowner in other ways. But if housing is very expensive and you could rent for much less, it may not make sense to tie up your money in real estate since homes are illiquid assets that generally don’t provide as good a return on investment as the stock market does.
You can compare costs of renting versus buying by using online tools such as a calculator on Realtor.com and Zillow’s rent-vs.-buy tool. If buying costs more, it doesn’t mean you shouldn’t ever purchase a home. But it does mean there’s a big opportunity cost to consider because the extra money going toward your house is a resource you can’t use for other goals, such as paying off student loans or saving for retirement.
2. What does the real estate market look like?
It’s ideal to buy a home when it’s a buyer’s market and the prices are low — so you can gain concessions from sellers, such as getting repairs done — rather than buying in a seller’s market and ending up in a bidding war for the property.
However, even real estate experts can’t time the market always. But you can take some steps to be better informed. You can look for signs your market is in a bubble, such as home affordability indexes showing whether prices are unaffordable when compared to local incomes. You also can review the Case-Schiller index, which tracks home prices over time, to see if property values have been rising or falling in your area.
Since timing the market is difficult, you might want to focus on whether homes in your market are affordable for you at current prices. Or talk with a real estate agent to get advice on pricing trends and other factors for the type of property you’re considering. “Getting into specifics with your real estate agent can help them answer questions about the market in the area,” said Zoe Kellerhals-Madussi, a real estate agent with Triplemint in New York City.
3. What are the current mortgage rates?
Interest rates affect your mortgage costs, so check with several lenders to get an idea of current rates in your region. You can use our mortgage calculator to see how much impact a rate change can make on your monthly payment.
The direction of interest rates can change quickly sometimes based on changes in the economy. Experts make projections in rates, so you can look at forecasts when deciding whether to buy now or wait for a possible rate decrease. But forecasts can be wrong, so you might want to focus on finding ways to keep your interest rate as low as possible by improving your credit and saving for a larger down payment.
4. Can you qualify for a mortgage?
Since most people can’t afford to pay cash for a home, you likely will need a mortgage, as well, if you hope to become a homeowner.
“Qualifying for a mortgage is the first step to purchasing a home,” Kellerhals-Madussi said. “The earlier you figure out how much a bank can or will lend you, the quicker you can lay out your game plan and either save or purchase immediately.”
To find out if you can qualify, check with some of the best mortgage lenders. Their requirements will vary, but there are some criteria you typically have to meet, including:
- A fair or better credit score — you’ll need a good score to get the best interest rates.
- You’ll need to provide proof of a reliable source of income.
- Total debt, including housing costs, should be below 43% of your income. If you have student debt, refinancing your student loans might help lower your monthly payments and improve your debt-to-income ratio to help you qualify for a mortgage.
- It’s smart to have money for a down payment to avoid paying for private mortgage insurance.
You can get preapproved for a mortgage before you start shopping. So you won’t waste time if you can’t qualify for a loan or borrow enough money to buy in your area.
5. What should your budget be?
Some homebuyers assume they should spend up to the amount they’re approved for on a mortgage. But this isn’t always a good idea. You may not want to borrow the maximum amount, because if you keep housing costs low, you’ll have more money to do other things.
“Any homebuyer should have a clear understanding of their income and expenses, so you can set a cap on how much you allocate to your mortgage and carry costs of your home,” Durosko advised.
Most financial experts recommend keeping total housing costs below 30% of monthly income — but as you decide what’s right for you, don’t forget how the mortgage might impact your other goals.
6. What will your total monthly costs be?
Mortgage lenders consider loan payments, property taxes, homeowners insurance, and homeowners association fees when deciding how much home you can afford. But you also have to consider maintenance, repairs, utilities, and other costs.
“Understanding all your expenses and knowing you can meet those expenses is a critically important question to ask,” Durosko said. “This way, you don’t run the risk of being overextended.”
Ask your agent to find out average utility costs for homes you’re considering. You can estimate repair and maintenance costs to be around 1% to 3% of the home’s value each year. While you may not need to spend this amount every year, set aside money in a savings account for big repairs in the future, such as a new roof.
7. How much will the closing costs be?
Make sure you can afford to pay closing costs, which typically equal 2% to 5% of a home price, according to data from Zillow. This money goes towards expenses such as property taxes, recording fees, and home inspections. “New homebuyers need to factor in the closing costs in addition to the purchase price to make sure the home remains within budget,” warned Durosko.
If you have the money for closing costs, can determine the answers to these other questions, and think it’s a good time to buy, start shopping for a home. Once I finally got through my homebuying process — and learned all the myriad things I should’ve known beforehand about qualifying for a mortgage and found how costly prorated property taxes can be — I ended up being very happy in my home. I hope you will be, too.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
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