So you’re weary of apartment life or sleeping in your parents’ basement, and you want to live in a house. Your own house. Meanwhile, you’re living with two voices in your head.
One of those voices says that you’ve reached that point in your life where you should become a homeowner, and the other says, “Whoa, hold the phone. There’s no law requiring me to be a homeowner. How do I know that I can take this on without going broke?”
You should listen to that second voice.
That’s not to say that you shouldn’t buy a house. Maybe it is time. Maybe it’s a swell idea. But as that second voice is telling you, there’s no need to rush into this. If you’re going to buy a house, and you want it to go well and don’t want regret your decision, there are six questions you should ask yourself first ― and make sure you have the right answers.
1. Do I have money in the bank?
As you’ve likely heard, mortgage lenders like it when you have enough money for a 20 percent down payment. So if you’re going to buy a $200,000 home, yes, that’s $40,000. If that depresses you, the good news is that you don’t have to have 20 percent.
“Some financing options require as little as 3 percent of the purchase price. Others require 10 to 20 percent,” says Ben Creamer, a principal and managing broker at Downtown Realty Co. in Chicago.
For that $200,000 home, 3 percent for a down payment would be $6,000, which may seem a bit more attainable. So you can probably avoid having to save up tens of thousands of dollars if you want a house, but you should still sock away money.
“In general, the more money you invest initially through a down payment, the smaller the monthly payment will be,” Creamer says.
And, of course, there isn’t just that money for the down payment. You will likely need something in the bank for closing costs, which are usually 2 to 5 percent of the loan. We’re talking property taxes, mortgage insurance, a title search fee and a home inspection, among other charges. Now, often you can roll them into the loan, but you’ll nonetheless want to steel yourself for that.
2. Am I carrying a lot of debt?
If you don’t have much money and you seem to owe just about everyone on the planet something, then you have even more reasons to hold off on buying a home.
Christopher Stjernholm is a managing broker and market director at Trelora, a residential real estate brokerage serving Denver and Seattle. He points out that a lender may prequalify you, but if you carry too much debt, “the buyer may find themselves in a situation called being house poor. Being house poor is usually defined as owning a house, but a large part of your pay goes to your mortgage, leaving little money for other things.”
The rule of thumb, most experts will tell you, is that you shouldn’t spend more than 30 percent of your monthly salary on your house. And lenders generally won’t approve a home to somebody who, after purchasing a property, will then have a debt-to-income ratio of 43 percent or more (that is, 43 percent of your salary is going toward paying debt).
That’s because, if that happens, things get financially uncomfortable for you fast.
“If the government takes anywhere from 15 to 30 percent of your paycheck, and 43 percent goes to debt, that leaves you ― depending what tax bracket you are in ― with about 35 percent of your check to meet your other basic needs such as food, gas and entertainment,” Stjernholm says.
So if you have some student loans, credit card debt and a car loan already, that won’t necessarily preclude lenders from approving you to borrow money for a house. But if your debt is severe enough, it might.
3. Did I just start a new job?
No? Good. Yes? Uh-oh. Now, maybe a lender won’t mind that you just started a new job if you’ve been on the same career path for some time, and your work profile looks stable. These lending rules usually aren’t cut into stone.
But lenders like to see stability. If you’ve been job-hopping for the last few years, or if you were unemployed for a while and only recently started working somewhere again, ideally, you’ll hold off applying for a mortgage.
How long should you ideally hold off?
“To purchase a home, you must be in good standing in your job for at least two years. If you are in a 1099 job, then you must be in good standing for three years,” says Gerri Edwards, a real estate agent based out of Charlotte, North Carolina.
4. Do I plan on starting a new job soon?
That’s probably fine, especially if you don’t make the switch before you get approval for a home loan, but the point of asking yourself that question is to think about where your life is right now. You want a house, but do you like the area you’re living in? Do you think you’ll stay there for a while? That’s important, if you don’t want to find yourself selling it in a few years, possibly at a loss.
“If you can’t commit to staying put for at least a few years, it’s probably not going to make sense to buy. Homeownership is like any other investment, meaning it grows over time ― just ask anyone who bought and held shares of Amazon 20 years ago,” says John Graff, a broker and the CEO of Ashby & Graff Real Estate in Los Angeles.
5. After I buy the house, will I have any money left?
This is important, too. Even if you aren’t carrying a lot of debt, and everything seems to line up for a home, will you have the cash to care for your house?
“Problems happen, and you’re going to need money to keep your home running,” Graff says. “As a renter, you were probably used to calling your landlord to fix ― and pay for ― problems whenever they arose, but as a homeowner, you’ve got no one to call but yourself.”
Of course, you could buy a condo and avoid having to pay for a lot of things, like outside maintenance. On the other hand, you will likely have to pay condominium association fees or homeowner association fees.
But it goes back to the idea that you don’t want to be house rich but cash poor. If you have a lawn but can’t afford a lawnmower or to pay for a lawn service, that’s a bad sign of things to come.
6. Do I have a low credit score?
You knew this was coming, right? First, the good news, which is also bad. You can buy a house without having excellent or even good credit.
“To get a mortgage, lenders are now going as low as 580 for a credit score but you also must have a good debt-to-income ratio,” Edwards says.
You can even get a Federal Housing Administration loan with as low a credit score as 500, Graff says.
But both professionals say that just because you can get approval for a house doesn’t mean you should try to, if your credit score is in the basement.
Graff says: “It’s usually best to wait until your score improves, so you can enjoy lower interest rates and lower monthly payments.”
“A score of 760 and up is an excellent credit score and will guarantee you an excellent rate,” Edwards says.
And, look, if you feel that by the time you get your credit score up that high, you’ll be ready for a nursing home instead, then at least do what you can to get it healthier. The more debt you pay off, and the more on-time bills you pay, the better off you’ll be anyway. But the bottom line is that if you want a good loan, your credit score needs to be reasonably healthy.
That’s especially true if you want something more than a starter home and have a dream home in mind. In fact, if you want buying a house to be a happy financial experience, your mantra from here on out should probably be: “I’ll build up my credit score, so I can build my house.”