Homeownership is the number one American Dream. Many people of all ages dream that they will one day own their own home. Although the financial crisis of 2008 and the current economic crisis created by COVID-19 has proven that homeownership is not always a safe bet. However, I have yet to meet anyone who swears never to buy a house because of these events. Let us not forget the lessons learned and review things we should consider before buying a house.
1. Get Out of Debt Before Taking on More
During the housing boom many people rushed into buying a house thinking that the value will continue to rise. Some do so even when they are burdened by other debt obligations. Owning a house will put significant pressure on your cash flow. If you’re having trouble paying off debt now, you should not think about buying a house.
Pay off your debt first and properly prepare yourself for this major financial responsibility.
2. Mind Your Cash Flow
Even when you are debt-free, it is wise to understand what the mortgage payments will do to your cash flow. When you have to pay your mortgage each month, would you still have enough money to achieve your other goals? Will you be able to put aside enough money for your retirement? What about saving for your child’s college fund? And do not forget the extra money you need to simply enjoy life.
3. Save Money for Down Payment
Sure, there are some lenders that will lend you money with 0% down, and plenty more will lend you money with less than 5% down payment. However, it is generally a good idea to have that 20%. By saving this much money, it proves that you have a good handle on your finances and the financial fortitude to pay your mortgage for the next 15-30 years.
Second, a large down payment means that your monthly mortgage payments will be much lower, making your housing costs much more manageable.
Third, when you put down 20%, you do not have to pay for private mortgage insurance.
4. Mind Your Credit Score
If you are on top of the three items above, your credit score should be good. But if you have a poor credit score for whatever reason, it might be worthwhile to wait until you have a chance to improve your credit before moving forward. It will probably take a year or two to fix your credit, but bad credit will cost you a lot of money over the loan lifetime.
5. Current Mortgage Rates
Right now mortgage rates are extraordinarily low, so this may seem like a strange point to consider. But you should realize that even a half-point difference in the interest rate could amount to a significant sum over the life of the loan. So it is always worthwhile to know the market, put yourself in the position to get the best mortgage rate and shop around for the most favorable mortgage term.
6. Are You Planning to Stick Around?
Homeownership is generally more expensive during the first few years and it typically takes 5-10 years to break even. Therefore, you should not buy a house if you are planning to move any time soon. Another reason not to buy a house is if you naturally like to move around regularly.
7. How is Your Life Situation?
Even when all the numbers look good, you have to consider your family situation. Do you have a solid relationship with your significant other? If your relationship is shaky, you might want to hold off on homeownership until you can work out the kinks — adding a house to the equation will make things more complicated.
If you are single and planning to get married one day, renting might also be better depending on your personal circumstance.
8. Be Prepared to Fix Things Around the House
Are you a handy person? Do you like to paint? Fix stuff? Mow the lawn? Shovel snow?
When you’re renting, most of the maintenance items are taken care of by the owner. But when you are the owner, all of these responsibilities are yours. Of course, you can hire people to take care of these things, but they could be expensive — especially if your cash flow is not all that great in the first place.
9. Don’t Forget the Extra Expenses
Many people think they have all the expenses figured out, but then forget some of the extra expenses that come with homeownership. Aside from the maintenance expenses mentioned above, you also have homeowner insurance and property tax to contend with. Depending on your location, you may also have to deal with homeowner association and other fees. Moreover, homeowners tend to spend more money on furniture and home decoration.
10. Rental Price versus Home Price
Last but not least, consider the current home prices against rental prices in your area. Long-term renting is more expensive than buying, but this is not always the case. If you are in an area where it is cheaper to rent, it might be worthwhile to wait until the situation is reversed.
Hopefully, I did not miss anything obvious on this list. If you can think of anything else, or if you just want to expand on some of the ideas presented, please feel free to leave a comment below.
Pinyo is a full-service Realtor with Berkshire Hathaway HomeServices PenFed Realty and an insurance agent with McEvoy Insurance & Financial Services. He specializes in representing clients in the purchase and sale of residential and investment properties throughout Virginia and Maryland areas around DC.