Just because you can make a certain monthly payment on a fabulous home doesn’t mean you can truly afford it, or that you’re ready for the responsibilities of home ownership. Consider these guidelines to help you decide whether or not you’re ready to take the plunge.
- Be as debt-free as possible. Take care of outstanding credit card balances, and make sure your bills are up-to-date. Having a car payment or a monthly cell-phone bill won’t kill you, but if you can’t even pay off credit cards or cover your obligations, lenders will question your ability to pay a mortgage.
- Save up for a down payment. Though homes can be purchased without a down payment, having cash to put down will get you a better mortgage, and you’ll save a healthy chunk of interest in the process. Making a 10 percent down payment is a good rule of thumb.
- Have an emergency fund before you purchase. It only takes one major problem such as a burst pipe or a furnace failure to instantly set you back thousands of dollars. If you’re not responsible enough to prepare for the worst, then you’re probably not ready to purchase a home.
- Consider all the expenses. Don’t forget about things like property taxes, utilities, maintenance costs, and insurances. These are just some of the ongoing costs associated with buying and maintaining a home.
- Decide on what you can afford before house hunting, and then stick to it. Don’t be wooed into a higher price bracket by a pretty home—decide on a price before house hunting. A good rule of thumb is to not exceed 30 percent of your income on your mortgage payment. Don’t base your figures off combined incomes if you’re married; being able to stay in your modest home should you or your spouse become unemployed is far better than losing your extravagant mansion because you overextended your budget.
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Having a well conceived, home purchasing plan ahead of time isn’t just a good idea, it’s key to ensuring you find the right home, in the right place, at the right price, while avoiding some common pitfalls that can snare unsuspecting buyers. Here are seven vital steps to help you make a successful home purchase:
- Decide on a price ahead of time, and stick to it: Examine your budget and set a maximum figure before venturing into the market.
- Get pre-approved for a mortgage: There’s no sense shopping for a home if you don’t qualify for a mortgage. Shop around, determine which mortgage type works best for you, and have the funds ready before you go house shopping.
- Choose your location wisely: Be diligent on researching potential neighborhoods. Talk with neighbors, check the school system, and spend time in the area. A mediocre house in a great neighborhood is better than a fabulous house in the bad part of town.
- Get a real estate agent: Even real estate agents usually purchase homes though other agents. They’re the experts, and when the technical legalities start cropping up, you’ll be thankful for their guidance and experience.
- Don’t skimp on the home inspection: Always hire a professional inspector to check out a potential home before finalizing the deal, even if one was already performed by the realtor or home owner.
- Look for homes that have been on the market for awhile: The best deals usually come from homes that have been on the market for at least 90 days, and in this market, there are plenty of homes out there.
- Be patient: Be prepared to “hurry up and wait” when it comes to the home buying process. A two to three month timeframe from start to finish isn’t unheard of, but as the saying goes, the best things come to those who wait.
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Fixed-Rate Mortgages (FRM)
Fixed-rate mortgages are just that—the interest rate is fixed for the duration of the loan. Fixed-rate mortgages are the more traditional type of loan, usually having a repayment term of 30 years, though some mortgages offer longer terms of 40 or 50 years, or as little as 15. While they offer security and stability, fixed-rate mortgages are generally more expensive to obtain and tougher to qualify for. Some unique fixed-rate mortgages include:
- Federal Housing Administration mortgage (FHA). This is commonly referred to as a first-time homebuyers mortgage, as it’s insured through the Federal Housing Administration and offers assistance to home buyers who may not otherwise qualify for a mortgage.
- Veterans Administration mortgage (VA). Similar to the FHA loan, VA loans are available only to eligible U.S. military veterans and their spouses, and they’re guaranteed by the U.S. Department of Veterans Affairs.
Adjustable-Rate Mortgages (ARM)
Adjustable-rate mortgages are subject to interest rate changes for the duration of the loan. Adjustable-rate mortgages come in a wide variety of styles and options, they are generally easier to obtain and are usually more affordable. The trade off is that adjustable-rate mortgages typically come with a greater set of risks, most notably an unexpected payment jump due to increasing interest rates, or an extension of the loan duration. Some common adjustable-rate mortgages include:
- Option ARM. This loan offers buyers a variety of payment options and amounts, which can be useful for buyers with a fluctuating income. Choosing the minimum payment can be dangerous, however, as it can lead to negative amortization—where the payment doesn’t cover the interest, which is then added to the principal loan.
- Fixed-period ARM. This loan will maintain a set interest rate for a specified amount of time, then adjust accordingly. The length of the term and how often it changes can vary depending on the terms of the loan.
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Types of Home Inspections
A pre-sale home inspection by an independent, licensed inspector is the most important step in the home buying process. It’s also a step many people are tempted to skip, because inspections aren’t usually required by law, and at $250 to $500, they aren’t exactly cheap. Don’t skimp however—a $500 investment at this stage of the game can save you from a potentially disastrous purchase, or give you ammunition to renegotiate a price should the inspector find issues. Some common home inspection types include:
- General: This is the standard pre-sale inspection that covers all aspects of the home. A general inspection usually takes two to three hours, and though buyers aren’t usually present for the entire time, meeting the inspector at the end of the visit for a review is quite common. General inspectors may also recommend specialized inspectors if specific problems are found.
- Foundation: This can be instrumental in determining any major foundation issues, including damage or movement.
- Pest: Termites, dry rot, and other biological issues can sometimes be hard to quantify. This inspection is recommended for older homes or houses in a rural location.
- Electrical: While a general inspection usually identifies whether or not a home’s electrical system is up to code, an electrical inspector can identify trouble spots or specific areas of concern.
- Roof: With most roofing jobs costing upwards of $5000, knowing the condition of the roof can help you plan for future repair costs, or negotiate a lower sale price if the roof is in rough shape.
- Environmental: A mold-infested house can appear normal, but can be an enormous health hazard. The presence of gases such as carbon monoxide, methane or radon can also be a potential deal breaker.
- Soil: Most prevalent for homes on hillsides or in mountainous terrain, having an inspection on the soil can help determine the fluidity of the ground. It can also spot soil contamination.
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