Buying a House
Buying a home is a financial goal for many Americans. But it’s hard to say when is the right time to make such a big step. Too many people have been suckered into subprime mortgages they couldn’t afford, so that the home was an expensive burden rather than the economic asset they had hoped.
Only by asking the right questions can you decide if it’s time to make one of the biggest financial investments of your life.
Five Questions to Ask Before Buying a Home
How Much Can I Afford?
As much as you want the house of your dreams, that dream will turn to a nightmare if you’re struggling every month to pay the mortgage. Lenders want to know the money they lend you will be repaid, so they use a rubric called DTI, which stands for debt to income ratio. Your mortgage payment should be less than or equal to 28% of your gross income and your total debt should be less than 36% of your gross income. When you apply for pre-approval, they will give you an estimate based on this number.
However, since lenders make more money on a larger mortgage, it is in your best interest to get advice from a financial advisor on how much you can truly afford. Your own expenses will affect how much you should borrow. For instance, if your monthly budget is full of non-negotiable costs, you shouldn’t plan on a mortgage payment that cuts into those. Nearly a quarter of all home buyers are still working to pay back student loans. You’ll want to consider whether you can pay both your student loan and a mortgage every month.
Last of all, you’ll want to consider how much you have in savings for the down payment.
Should I Try to Put 20% Down?
With a conventional loan, you need to have enough money for a 20% down payment to avoid private mortgage insurance (PMI). This additional monthly fee on top of your mortgage payment is to protect the lender in the event you default on the loan.
Avoiding PMI is a smart financial decision. It will save you approximately 1% of the total home loan. However, some types of mortgages may allow you to pay less down without the additional expense of PMI.
What Type of Mortgage Can I Choose?
A financial advisor can help you sort through the different types of mortgage loans.
Conventional loans: these require 20% down or private mortgage insurance. You will need a strong credit score and plenty of money in savings.
Government-backed loans: These include FHA, USDA, and VA loans. Each has different qualifying conditions, but all allow certain types of homebuyers to put less money down with a smaller penalty than a conventional loan. A financial advisor can help you see if you qualify.
Adjustable-rate mortgages: In these loans, your interest rate will fluctuate with the market. While you may pay less in interest overall, you won’t be able to predict what your mortgage payment will be from year to year. That can be disastrous if you aren’t prepared for the increased risk.
How Do I Handle the Uncertainty Associated with Property Taxes?
The mortgage isn’t the only expense you’ll have with a new home. You will also have to pay property taxes, which will change unpredictably. If your house is reassessed at a higher value, or if the city or county raises tax rates, your payment will go up. This is one reason why your home buying budget can’t be too tight. There must be some leeway for the fluctuating cost of property tax.
Property insurance is another required expense of home ownership, which may or may not be included in your escrow payment. Some homes have HOA (Home Owner Association) fees associated with them as well.
Do I Have the Funds for Repairs and Maintenance Costs?
Another reason to leave wiggle room in your housing budget is the ongoing cost of maintenance. If you rented in the past, all those expenses were your landlord’s responsibility. Once you own a home, all that burden will be yours. Many homeowners are shocked at first at the cost of repairing damage and replacing appliances.
Be prepared to put aside 1-2% of the home’s cost, more if it’s a fixer-upper. An alternative is to buy a home warranty, which covers the cost of many repairs. Even if you have a warranty, though, it’s important to have some savings in case something isn’t covered. Set aside a certain amount every month, earmarked for repairs.
How to Find a Financial Advisor Before Buying a House
Every one of these questions will be easier to answer with some good advice. A skilled financial advisor is an expert at homebuying and knows the pitfalls. With their help, you can decide how much you can afford, how much to put down, what type of mortgage to choose, and how to budget for taxes and repairs.
Do you know who can help match you with the right financial advisor? We at Advice Chaser listen to your unique needs, goals, and questions and help you find an experienced advisor from the thousands of financial advisors we’ve interviewed. Contact us today.