When buying your home there are a lot of things you’ll think about before you make that offer. What style your house should be? Which location? Which size? Which features should the new home have? And for most home buyers this is the first (and most fun) step. However, there are a few other things to contemplate before entering the journey into HAPPY home ownership.
1. Don’t bite off more mortgage than you can chew.
Dave Ramsey advises to not have a higher mortgage payment (PITI – Principal, Interest, Taxes, Insurance) more than 25% of your gross income. While a higher ratio does not mean you HAVE to lose your home, a recent Mint.com money mistakes survey determined that 20% of you admitted to spending more than 30% of your income on housing. It’s definitely not a good start to your wealth building in real estate by becoming house poor.
2. Have at least one steady income in the family!
Does it sound silly to mention this? Banks will make sure that you have a steady income. Generally, if you are self-employed or you haven’t held your job for at least 2 years, it will be challenging to qualify for your new mortgage.
3. Carry few or no other debts.
A reasonably sized mortgage quickly becomes an unreasonable burden when you mix it with student loans, car loans, and credit card debt. Lenders will allow a 43% or more debt to income ratio. But is that ideal? Depending on your situation, this has led a lot of homeowners into financial troubles.
4. Keep a big buffer.
On top of debt repayment, you have other non-negotiable bills every month: utilities, insurance, a basic level of food and clothing, and maybe a tuition payment. Then there are discretionary expenses: saving, dining out, entertainment, travel, etc. Consider all of them, and ideally prepare a budget, before you decide how much you WANT to spend on a house.
5. Have an emergency fund.
Don’t drain your well stocked emergency fund for a down payment. If you don’t have one, you’re not ready for a mortgage no matter how perfect the house you want is.
6. Have good life, disability, and health insurance
If you’re uninsured or underinsured, you’re in no position to buy a house unless you’re sitting on a giant pile of money.
7. Bring a 20% down payment.
Small down payments lead to big problems. Reuters’ Felix Salmon crunched the numbers last year and found that mortgages with a 15% down payment were more than twice as likely to become delinquent as mortgages with a 20% down payment for most years before the financial crisis. Lower down payments did much worse.
8. Never include and expect appreciation of real estate you own.
In fact, NEVER count on appreciation. It’s great if it happens, but don’t count on it.
Home equity is great—that’s why you should bring a big down payment. But it’s also undiversified, subject to the ups and downs of the real estate market, and hard to quickly turn into cash. It’s fine to have your retirement savings plan reflect the fact that your mortgage will be paid off in retirement and your ongoing housing costs will be low (although, you’ll still be on the hook for maintenance, property tax, and insurance).
9. Stay put.
If you don’t have the time to stay in your home for 4 years or longer, reconsider if buying is really for you. Most people underestimate how soon they’ll want to (or need to) move. Look at your past behavior and be realistic.
10. Buy your home as if you’ll rent it tomorrow.
If you intend to rent your home at some point consider buying your home with that objective. Which homes rent quickly and which areas will bring you the best or highest rent? A 3 bedroom, 2 bath and 2 car garage home with about 2,100sqf is quite average.
Now that you’ve heard all this, are you still ready to buy a home? Call me and we can discuss your dreams and wishes and I will help you make them a reality.
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