I love Spring! The snow is melting. The days are getting longer. I wake up in the morning to hear the birds chirping outside my window. My tulips are even popping up along the west side of the house. I am getting antsy to get outside more. My kids are definitely getting antsy to get outside more. Even my wife (not so much an outdoorsy kind of person) is ready for it to be nice out.
You know who else is getting antsy? Anyone thinking about buying a home. Here in South Dakota, the winter brings a normal lull to home-buying. After all, who wants to move in the middle of a blizzard? But now that it’s getting nice out…..
While we encourage home ownership for anyone that is ready, willing, and able, we also realize that there are two groups that should not be so antsy about moving. First, there are those who don’t want to own a home – and that’s ok. Second, there are those who want to own, but just aren’t ready.
Below are 10 simple (at least seemingly) questions to help you evaluate whether or not you are ready to be out shopping for a home.
1. Are you really SURE you want to buy a house?
Let’s be honest. Not everyone WANTS to own a home. If you are in a good rental situation, you don’t have to worry about any maintenance, inside or out. You are much freer to move around if you decide on a change of scenery. But home ownership is a commitment that will impact many other aspects of your life. Not that those impacts are necessarily good or bad, but rather do they suit your lifestyle?
2. Do you have a steady income and stable employment?
There is no point in getting a mortgage if you aren’t going to be able to make your payments. If either of these items are up in the air for you, you may want to solidify things before making the commitment of buying a home. Plus, the lender is probably going to require this stability as well before even giving you the loan.
3. Do you plan to stay in the home for at least several years?
As much as it costs to buy a home, it also costs money to sell a home. You have to pay off the remaining mortgage, pay for the services of those helping you with the transaction, make repairs to the home to make it marketable, and more. Unless you are making a substantial down payment, plan to be in the home at least several years so that you build enough equity to be able to pay these costs out of the proceeds from the sale of your home.
4. Do you keep a budget so you know how much you can realistically afford for a mortgage payment?
In the bigger picture of consumer credit counseling, one of the biggest issues we run into is that our clients simply don’t know where their money is going. Quick! Without researching, how much did you spend on groceries last month? Gas for the car? All of those expenses are less money available for your mortgage payment.
5. Do you know where your credit report and credit score stand or have other methods of documenting a positive credit history?
As a reflection of your previous financial behaviors, this is one of the quickest disqualifiers that lenders will use to refuse a loan to you. Even a single point under the minimum can keep you from being approved. Bigger than just a mortgage, your credit score is used in many other ways including determining your insurance premiums, being offered a job, and even getting a checking account. There are a lot of factors that go into your credit score, and you get a copy of your credit report for free. Make sure you know your standing.
6. Is your credit score high enough to qualify for a mortgage?
As I mentioned before, being even a single point below the minimum score requirement can exclude you from getting a mortgage. But fear not, while last year’s average credit score in the U.S. was about 680, many lenders require a score of 640 to be approved. Do you know where your is at? And is that score the FICO score that nearly all lenders use or one of the several other scoring models?
7. Do you have enough money saved for a down payment and closing costs? If not, do you know of/have access to other resources for those funds?
It used to be that you needed 20% of the purchase price as a down payment. While a higher down payment lends to better financial stability, many home buyers can get minimum down payment minimums of 3.5%, 3%, or even 0% down payment. There are also down payment assistance programs available to help with those funds. Do you know about them?
8. Have you been pre-approved by a lender for a mortgage?
This is not a 20-minute conversation. The pre-approval process is how the lender evaluates your financial situation and decides how much of a loan you can afford, or qualify for. This is a piece that most sellers want to see at the same time as presenting your purchase offer. Therefore, it is something you want to have in place before you find the home of your dreams.
9. Is your existing debt low enough that it will not limit your ability to qualify for a mortgage? If not, can you reduce your debt before moving ahead with a home purchase?
Debt-to-income ratios are a part of the approval process lenders go through. If your other debt is too high, you may not qualify for enough of a loan or any loan at all. Depending on the type of debt, if it exists at all, it may disqualify you from getting a mortgage. Paying down other debt may actually be more crucial than saving more money for a down payment.
10. Have you looked into the benefits and requirements of the different mortgage and assistance programs that are available?
Referenced above, there are all kinds of mortgage and assistance programs that can be used by a variety of home buyers. While you may qualify for them, they may not be the best option for you. Conversely, if you don’t need them, they may still be a better service to you than going without. Know what is available so you can at least make an informed decision even if you decide ‘no’.
A ‘yes’ to all 10 of these questions means you are ready to buy a home. Couldn’t answer yes to all of them? Well, some people will still end up buying a home. But to make sure you end op in the best situation possible, make sure you can answer yes to all of these questions, even if it means you need to do some homework.
If you aren’t sure where to start, the Center for Financial Resources provides a free Homebuyer Express class for anyone even considering buying a home. It is a six-hour class that covers all ten of these questions and more. In fact, we regularly get feedback from clients that they would like it to be longer so that we can cover more yet. You can find the schedule of classes and register on our website. If the dates don’t work, give us a call at 605-330-2700 and we can schedule you for a one-on-one. Not close to one of our offices? We can even work through video conferencing to make sure you are ready.
written by Breck Miller
images courtesy freedigitalphotos.net