You don’t need a blog post to tell you that buying a home is a massive financial investment. You’re probably worrying already about the down payment, interest rates, loan approval, and staying financially stable enough for the next 30 years to pay it off.
Then there are the other risks that come with home ownership, like $7,000 plumbing jobs and potential pest infestations. More and more, millennials prefer to rent rather than go through the financial hassle of buying a house.
Home ownership among those aged 18 to 35 has fallen significantly over the last few years. It’s down to 63.5 percent, the lowest since 1967. Millennials love the convenience of letting a landlord handle the bulk of the duties and not having to deal with major expenses.
But this article isn’t intended to dissuade you from purchasing a home. We’re just examining the basic risks of purchasing a home, so you can be ready for the financial obligation.
This doesn’t have to be an insurmountable venture as long as you know the risks and are prepared going in. Preparation might take several years, but the patience and attention to detail you apply will be well worth the delay.
As you prepare for what may be the biggest investment for your life, the top financial considerations will be the following.
Banks are more ready to lend now than a few years ago, but they won’t give money to just anyone. According to the U.S. Department of Housing and Urban Development, homeowners can qualify for a mortgage with a credit score as low as 580, but they’ll get a pretty rotten deal.
Mortgages for credit scores in that range feature high interest rates and extra fees. Most banks look for credit scores at a minimum of 650. If you have a score in that range, you’ll get a fairly good interest rate. If you’re above 750, though you’ll get the best rates on the market.
Maintaining a good credit score or improving a bad one is vital for getting good rates on a home purchase. You can improve your score by keeping up with payments for several years before you apply.
This is the best way to improve your score, but you might talk to a credit repair counselor to learn what specific options you have.
Your first major savings should be aimed at a down payment. You can get a mortgage with a down payment of just 5 percent of the asking price. But if you want the optimum interest rates, you should aim for 20 percent of the home’s value.
This means if you’re hoping to purchase a home that’s worth $200,000, you’ll need a down payment of $40,000. Most people don’t have that kind of cash lying around. Start saving now.
This may require some significant lifestyle changes, but it means you could save thousands on interest payments, so it’s more than worth it. You’ll also need to consider closing costs and fees, which can run as much as $4,000 on a $200,000 home. Don’t forget to factor that in as you set your savings goals.
You’ll also want to save for potential expenses of home ownership. Most people can afford to make home repairs, but they tend to spend the money on other things.
It’s critical to determine how much home you can realistically afford before you take the leap. You’ll discuss this with your loan officer, who can make suggestions regarding what you can and can’t afford. For example, your home payment cannot exceed 31 percent of your monthly income, according to FHA laws.
Note that how much home you can afford may be different from how much you can be pre approved for on a loan. You might be approved for a loan of $500,000, but if your lifestyle means you can’t keep up the payments, you should look for a more affordable option.
To be realistic, the Credit Union National Association recommends that your monthly mortgage payments and expenses not exceed more than 28 percent of your gross monthly income, but some play it safer and aim for 25 percent of their income. Spend some time playing with a mortgage rate calculator to visualize what you can afford.
You don’t want to take a huge risk with what could be the largest purchase of your life, so try to make sure your debt-to-asset ratio is something you’ll be able to sustain for 30 years.
Preapproval is a key consideration because it can take time. The application and approval process may be quite extensive, with plenty of meetings and paperwork. Homebuyers should have everything in order before they start looking for a house.
This advice is pertinent because homes go on and off the market so quickly. You might find a home you love in your potential price range, only to find it’s off the market by the time you’re ready to make the purchase.
Having your loan approval in place before you make an offer also facilitates a smoother closing process so you can get into your new home more quickly.
The old way of thinking was that you should start with an affordable “starter home” and move on to a larger one later as your family grows and needs change. But it’s more financially feasible to purchase a home you really love now, in which you can see yourself living for all time.
Obviously, you may not really end up living there until you die. There are too many variables to make that assumption. But the principle remains: If you like where you live, you’re less likely to lose money on moving, renovating, and home shopping.
Also, look for a home that will last the span of your mortgage. The best piece of advice for any new homebuyer is to avoid residences that are potential money pits, which cause you to throw money into repairs without any return.
To avoid purchasing a home that won’t last as long as you do, here are some tips:
Choosing a home that’s in good shape and promises to last for several years will result in huge savings over the long haul.
Whether you’re looking for a home to live in or a great investment property in the Houston and Katy areas, Green Residential can help. We’ll assist in putting your home on the market and showing you some incredible new listings in the area.
Unlike most Realtors, we offer a flat-rate fee for our real estate services as opposed to a six-percent commission, and that can save you thousands. For more information about what we do and how we can help you save big, contact us today!
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