Buying a house for the first time can be a fear-inducing yet equally exciting affair. Whether you realize it or not, you’re on the brink of making a huge financial decision and any wrong move will cost you a huge amount of money and mental sanity. But, if you’ve saved enough money for your first home’s down payment then you’re off to a great start but if you want to ensure success make sure you consider the following 5 considerations!
Number 1: Your Current Financial Position
Want to purchase a house? Well, before you do you should assess your present financial capacity to do so. The thing is, besides being so damn expensive upfront, homeownership brings with it a new load of financial responsibilities. From saving for a down payment to heavy property taxes and maintenance costs, you have to ensure you’re financially equipped to bare the burden of buying a house. But here’s the bright side — you are in control of how much financial responsibility you take on and you do this by buying responsibly.
Regardless of how much your bank is willing to offer you, you should stick to your intended budget. And I can assure you one thing. The moment you decide to start hunting for the best mortgage deals, multiple lenders will approach you with well-packaged quotes. However, no matter how convincing their courting dance is, don’t settle for the first lender that offers you a quote. Instead, shop around and only settle for the one that fits your budget and expectations. This is because while banks are in the lending business to mint money, your mortgage is just another expensive financial commitment that will cost you big time.
Having said that, make sure you know all your options when it comes to purchasing a home. Typically, you can either buy a house by obtaining a mortgage or whipping out the full amount in cash like the billionaire you are. It so happens, the latter option is only viable for the chosen few and since buying a house with cash is impractical for most aspiring homeowners, seeking a mortgage tends to be the next best option. A mortgage is simply a loan obtained from a lender (usually a bank or mortgage company) to pay for a property. Primarily, any lender will require you to pay a lump sum in cash during the early stages of buying your house. This lump sum is known as a down payment. Basically, the down payment is a small percentage of the house’s purchasing price, usually 20% or less. However, different lenders will have varied expectations regarding how much money you should pay upfront. And while you may feel the pinch of having to cough up a large wad of cash up front, making a significant down payment will definitely work in your favor.
What happens is that paying more money upfront will help downsize the amount of interest that your loan generates. For example, let’s assume that an aspiring homeowner borrows $100,000 to buy a house without making a down payment. If the loan has an interest rate of 5%, the said buyer will have accrued $5,000 worth of interest in the first year alone. However, if this person pays a 20% down payment upfront, they’ll only need to borrow the remaining $80,000. By the end of the first year, they’ll be owing to an interest of only $4,000. As you can see, having money down is beneficial since it helps in shrink your total interest owed and it will also lower your monthly payments.
Number 2: Determine Your Future Financial Outlook
The second consideration you need to make before buying a house is your future financial outlook. In other words, does your financial trajectory allow you to take on a heavy expense? If the answer is no then it’s better to bide your time until your finances are stable enough. See, homeownership is a huge deal, and whether you like it or not, it is bound to leave a big dent in your finances. If you don’t want to end up ‘house-poor,’ have a clear projection of your income, lifestyle, and growth of investments before making up your mind. Keep in mind that home buying is a commitment and before you bind yourself to a 30-year mortgage, it’s best to be assured of your job and income security. For example, will you still be able to pay off your mortgage in the case of a recession? What if you lost your job? Will your investments step-up and finance your debt? How do you picture your lifestyle a few years down the road? For example, in the case of income security, paying little attention to it might cost you in the future. I’m sure you’ve heard creditors auctioning off houses because the original buyer defaulted. Well, the possibility isn’t far off; it can happen to anyone, including you.
Finally, when buying a house, it’s crucial to have a futuristic perspective. Do not fixate on your present lifestyle, but rather, leave some wiggle room for any unexpected lifestyle changes. If you intend to lease or rent out your house or part of it, it will be best to make projections of how much rental income you expect.
Most importantly, make sure you’re in a secure employment position before pulling the switch. And if possible, have promising investments that you can fall back on in case your monthly paycheck is compromised.
Number 3: Ensure You Have Adequate Credit
The next factor you should consider before buying a home is your credit score. Chances are, you’ve interacted with this term before, especially if you’ve been contemplating homeownership. Basically, there’s a criterion you have to meet before you’re considered eligible for any loan, including a mortgage. The metric that is normally used to weed out those eligible and those who aren’t is what we refer to as a credit score.
In simpler terms, a credit score is a number system between 300 and 850 that reflects a customer’s creditworthiness. Scores that are higher than 800 are considered excellent, and these are the people who get access to the most lucrative loan rates. A higher credit score (above 720) depicts a trustable reputation from your previous lenders; hence other creditors will equally feel safe lending you money. If, on the other hand, your credit score falls short of 670, you will need to work towards improving it. This is because a bad credit score will scare potential lenders, including banks and mortgage companies. At best, you’ll be offered a mortgage on the condition that you provide a large down payment or are willing to accept a mortgage at less than ideal interest rates. Having said that, a bad credit score shouldn’t necessarily spell doom and neither should it shatter your dream of owning a home. There are proven strategies that can help you polish your credit score and qualify for a good mortgage quote.
If you’re determined to knock down your bad score, the first step is to understand what put you there in the first place. Student loans and credit card debts are some of the most common causes of poor credit scores. Your next move should then be paying them off then directing your efforts to paying subsequent bills on time. No doubt, good payment history is your best shot at getting a higher score. Another way is to take a thorough look at your credit reports. If you spot an error that might have mistakenly lowered your score, go ahead and lodge a complaint so that it’s corrected. Finally, if you’re a credit card fanatic, don’t use more than 30% of your credit card limit.
As you can see, even a bad score can be reversed if you’re disciplined and determined enough. Essentially, you’ll need an average score of 620 to qualify for a mortgage, but the higher it is, the better.
Number 4: Commit To A Home Location
The next factor to consider before buying a house is the desire to commit to one location. One of the gravest mistakes you can make as a future homeowner is letting the ink go dry on a home whose location you’re unsure about. Essentially, you need to ask yourself whether your expected duration of stay makes buying worth it. Maybe you’re looking forward to changing jobs, moving cities, or switching to a career that requires you to travel a lot. In such instances, it would be more feasible to rent than to overstretch your financial muscle for a home you’ll barely live in.
Ideally, you should only make the jump if your mind is settled on where you want to work, raise your family, and possibly retire. Start by narrowing down potential locations that you wouldn’t mind living in and then conduct an analysis of their real estate markets. What do the recent sale prices look like? Do these prices coincide with your budget? How much room for expansion do their cities have? Do the standard of schools match-up with your ideals? These are some of the questions that will help you rule out locations that don’t tickle your preferences. Preferably, choose a location that is central, accessible, developed, and safe. Remember that the profitability of a great location will remain constant regardless of how volatile the market becomes. If you find a location that ticks all your boxes, then you’re one step closer to making the biggest purchase of your life!
Number 5: Survey The Current Real Estate Market
Lastly, an in-depth understanding of the real estate market is paramount if you plan to buy a house. And no, this does not imply attending a real estate class and aiming to become a realtor. It’s a fact that learning the market single-handedly can be a long trip, which is why I advise you to consult a professional real estate agent. Once you find a good one, don’t be afraid to ask them questions, even those that sound dumb. Ask them how the local market works and some of the factors that shape any specific area’s economy. If you wish to know, inquire about the demographics of your location-of-interest. Most importantly, let them explain to you the paper-work involved in purchasing a house, depending on the state’s laws. One crucial benefit of using an agent is that their understanding of the local market is top-notch. Besides, professional realtors have mastered the art of negotiating for good prices; hence you’ll be better placed to save some coin.
However, even as you let your agent guide you on your purchase, it’s good that you also understand important market terms and concepts. This is because the market plays a critical role in how much you’ll spend on a house and whether you’ll land a good deal. For example, when is the best time to buy or sell a house? Because while you’ll find houses on sale at any time, there are specific times when the market isn’t favorable to buyers. So, in a nutshell, the real estate market is shaped by two major factors:
Demand for Houses: This is the number of willing buyers in the market; and
Supply of houses: This is the number of houses listed for sale.
Essentially, a buyer’s market is when the supply for listed houses surpasses the number of willing buyers. These market conditions will exert downward pressure on the property prices since every seller is competing for your attention to avoid having their property listed for a long time. This is the best time to purchase property, and you’ll likely get a good deal. On the other hand, a seller’s market is when the demand for houses surpasses the supply. These market conditions give sellers leverage over buyers because they have multiple interested sellers to sell to. At all costs, avoid buying a house during this time, and if you have to, then move fast, lest someone else grabs the offer.
There you go! You’re now prepared to snag that beautiful home of yours! Best of luck!