10 Things to Know Before Buying A Home
The decision to buy a home seldom comes overnight—indeed, even seasoned investors think long and hard before putting money into real estate. For most people, it’s the single most important investment they’ll ever make. So it’s only natural, even practical, to get informed before taking that step. Here are ten things worth knowing if you want to get your money’s worth.
1. Are you ready to settle?
One sign that you’re ready to own a home is if you can see yourself staying in one place for more than a couple of years. Less than that, it’s seldom worth the trouble (and transaction costs) of reselling and moving out again. Even if the market were doing better, you’ll only lose money by buying a home when you can’t stay put just yet.
2. How’s your credit?
You’ll most likely need a mortgage to buy your home. To get the best deals, you need good credit—it’s the banks’ way of knowing how likely you are to keep up with payments. Start by getting copies of our credit report and double-checking the facts. Do this at least a few months before house-hunting so you’ll have time to fix any problems.
3. How much can you afford?
As a general rule, you should aim for a house worth two and a half times your annual income. If you’re making $100,000, you can probably comfortably afford a $250,000 home. Of course, there are other factors to take into account, such as your debts and other monthly expenses. Try talking to a financial adviser to set a more precise budget.
4. Can you afford the down payment?
Aim for a down payment of at least 20 percent of the home’s value. This will get you prime rates and terms at most major banks. You can still get financing with less—some banks will accept as little as 3 percent—but the more you can put down, the better.
5. How’s the neighborhood?
Experts recommend buying in a district with good schools, even if you don’t have school-age kids. Historically, areas with a strong educational community tend to have higher property values. This gives you solid equity for when you need to refinance, and ensures a decent profit when you need to resell later on.
6. Do you have an agent?
A professional agent can help whether you’re buying your first home or your fifth. It’s not just about getting access to listings; a good agent can also help you arrange for financing, negotiate with sellers, and plan the move. Look for an exclusive buyer’s agent—they won’t be limited to certain sellers and can give you smart bidding strategies.
7. Do you want to buy points?
A point is a small portion of the interest (usually 1% of the value) that you can pay up front in exchange for a lower interest rate. It helps the lenders stay liquid and, if you stay in the home long enough, will save you money in the long run. Sit down with your agent and decide whether or not the points are worth taking.
8. Are you pre-approved?
Getting pre-approved is becoming more or less standard in home buying—some sellers won’t even look at offers that don’t come with pre-approval letters. It also saves you the trouble of looking at homes you can’t afford, since you know at the outset what your limits are. Don’t get it confused with pre-qualification: a pre-qualification is just a quick assessment of your finances, while a pre-approval takes into account such factors as debt, income, and credit history.
9. What’s the market like?
You need a good grasp of the local market if you want to make a reasonable bid. Your agent can give you a comparative market analysis of recently sold homes similar to the one you’re buying, which you can use as a benchmark for your offer. For example, if similar homes have sold for 5 percent lower than the listed price, you should bit at about 8 to 10 percent lower to give yourself negotiating room.
10. What condition is the home in?
Most lenders will require a home appraisal, but that’s mostly to make sure the home is worth what you’re paying for it. A professional home inspection will reveal any problems in construction, wiring, and piping, which could cost you thousands later on. Inspectors should also issue home insurance, which will keep you covered in case they overlook something that causes problems down the road.
5 Tips for Today’s Home Buyer
Price matters notwithstanding, buying a home in today’s economy is different than in years past. As a potential buyer, here are 5 important considerations before you purchase a home in the near future:
1. Flip at your own risk. The housing market is looking up, but if we’ve learned anything over the past two years, it’s that real estate isn’t always a sure thing. Unless you have a steady stream of truly disposable income, purchasing houses as short-term investments is very risky. Ideally, you should only purchase a home in the coming year if you plan to live in it for at least three to five years, says Mike Larson, a real estate analyst at Weiss Research. With the risk of home values declining yet again, doing otherwise puts you at risk for being upside down in the house—a position no one wants to be in.
2. Purchase within your means. Your monthly housing payment should not exceed 35 percent of your gross monthly household income. With most of the country still feeling the effects of the credit crunch, now is not a good time to stretch your finances. Make sure your potential purchase is something you can conservatively afford. Also, given the current low rates, it’s best to target a 30-year, fixed-rate mortgage rather than an adjustable rate that may seem enticing, but is much more unpredictable.
3. Consider job security. With unemployment rates high and predicted to rise, you are wise to consider you and your family’s level of job security before entering into a real estate transaction. A sudden loss of income makes it extremely difficult to maintain an otherwise affordable mortgage. In many cases, job loss can result in default. In order to get the best mortgage rates, most would-be home buyers will need solid credit, a decent down payment, and documented income verification, says Keith Gumbinger, vice president of HSH Associates. Therefore, if you’re uncertain about your job security, or if you can’t meet the credit requirements, you should probably hold off on buying a home until the economic outlook improves.
4. Explore the foreclosure market. Foreclosed properties often mean sharp discounts and could result in you being able to purchase more house than you could otherwise afford. Because foreclosed home buying presents its own unique set of challenges, it’s best to seek the help of a professional with experience in the foreclosure market unless you are a veteran real estate investor.
5. Ask and you just might receive. Given the excess number of homes on the market, buyers have the advantage. Without insulting the seller, now is the time to ask for concessions along with the sale. Help with closing costs, a decorating allowance, even considerably lower than listing price offers are all fair game in today’s market where sellers are anxious to move property. Or, if you have some other form of concession in mind, ask for it!