Are You Financially Prepared to Buy Your First Home?
Submitted by Holly Welles - Holly Welles is a freelance writer with a focus on finance and real estate. You can find more of her advice on her blog, The Estate Update, or keep up with her writing on Twitter.
(Contributions are guest opinions only and don’t reflect the opinion or endorsement of Money Fit by DRS, our staff, client or other interested parties.)
How Prepared Are You To Buy Your New Home?
Buying a home is undoubtedly a milestone, but it's one you may not be ready to undertake — and that's OK. It's crucial to take the time necessary to determine if you have the required financial preparedness for homeownership, or if it's better to keep renting. This checklist should help.
1. Look at Your Saving and Spending Trends
Examine how much money you typically spend in a month compared to what you earn. Using an online spending tracker can be useful for learning how much of your income goes to specific spending categories. The information it gives you could provide valuable guidance if you're wondering where you might be able to cut some expenses.
Also, understand making progress toward homeownership could require making substantial lifestyle changes. A Bank of America poll found nearly half of the respondents from generation Z and 38% of millennials were willing to get a second job to save more money for their future homes.
The same survey also revealed 93% of people who currently own a home say the benefits outweigh the challenges.
2. Check Your Credit Score
It's easier than it once was to keep tabs on your credit score, especially since some credit card providers offer free and ongoing credit monitoring as a customer perk and allow you to check your score whenever you log in to see activity through an online portal.
Your credit score could substantially affect your ability to get approved for a mortgage, as well as things like the rate and your eligibility for particular loan programs. Plus, if you have a high credit score, but fall short in some of the other categories lenders assess, your creditworthiness could result in more leniency as your application for a loan gets evaluated.
3. Factor Maintenance Into Your Budget
Some homeowners get so excited about buying their first abodes that they forget about the expenses associated with maintaining the home. The amount of money needed for maintenance will likely be higher if you buy an older home, but even if you purchase a residence that's new or almost new, you'll still need to consistently spend money to keep it in good condition.
Doing that will pay off if you decide to sell the home, and staying on top of maintenance should make it less likely you'll deal with home-related catastrophes due to neglected upkeep.
According to a 2019 Bankrate survey, 44% of overall homeowners had regrets about their home purchases, and the percentage increased to 63% among millennials. Maintenance or hidden costs were the top complaints that caused people to have buyer's remorse.
That's not to say you should let maintenance necessities dash your homeownership hopes, but it's crucial to plan your budget accordingly so you don't find out too late that you can afford a house, but not the maintenance that comes with it.
4. Plan for the Down Payment and Other Costs That Come Into Play Before a Purchase
As you continue considering whether now is the time to make your homeownership dreams come to fruition, be sure you don't overlook the amount you'll need for the down payment. It's a percentage of the purchase price you pay upfront to secure the property. The down payment can range from 3.5% of the home's value up to 20% or more.
Bear in mind that there are other pre-purchase costs, such as the earnest money deposit, the home appraisal and the expenses for an inspection, too. Ensuring you have the budget for those will help you avoid preventable panic.
5. Find out About Your Property Tax Obligations
The amount of property tax you pay depends on your location, and it can change from year to year. You'll pay property tax when you buy a home, plus annually. It's worthwhile to research the property taxes in particular areas, especially if you're still open to reviewing the options for where you might settle. You can also use an online property tax calculator to see the differences in the amounts you pay based on various home value and location inputs.
6. Assess Your Job/Location-Based Stability
How long have you been in your current job? Have you noticed warning signs that could indicate you'll need to look for new employment soon, or are you getting fed up with the conditions at your workplace and thinking about moving on? You must consider those things before becoming a homeowner, especially since mortgage lenders typically look at your employment history for the past two years and use it to calculate income.
Then, think about the chances you might need or want to move soon. If you're in a committed relationship and living with your partner, that's a factor too, especially if they might get transferred for a job or they have perpetually told you they dislike the area.
7. Identify Your Primary Motivations
It's crucial to think about the main reasons why you're thinking about owning a home. Are you doing it to impress your friends and loved ones, or because you're frustrated with a stressful or overly restrictive rental situation? If so, homeownership may not be the best option for now. You don't necessarily want to allow circumstances to push you into making a hasty decision.
But, if you've been prioritizing homeownership for a while, have taken definitive steps to help it happen and feel the decision aligns with your goals for life, those are good signs you have healthy and realistic reasons for choosing to buy a home instead of continuing to rent.
Decide if You’re Really Ready to Buy a Home
Going over the aspects mentioned here should help you decide if your financial situation makes owning a home feasible. If it doesn't, remember there's no shame in continuing to rent. First and foremost, take a realistic look at your financial standing, then use that information to make a wise decision.