If you’ve been binge-watching HGTV lately, you might be thinking that buying a home could be the right decision for you. But #RealMoneyTalk — are you actually ready to be a homeowner, or are you simply allured by the idea of living two minutes away from your favorite coffee shop?
We get it, real estate shows display the glamorous side of shopping for a home, however, most of the shoppers had a long list of considerations they had to make before being ready to buy. But what exactly are the things you should be thinking about before buying a home? We developed these top questions you need to ask yourself to see if it’s the right time for a home or if you just need to switch to a new TV series.
Think you can pass the test? If you’re able to answer “yes” to all of these questions, we’ll allow you to dive headfirst down the Zillow rabbit hole.
Can I Actually Afford to Buy a Home?
When you’re in the market for a new home, chances are you’ll have to compromise at some point along the way. Maybe you’ll have to commute a little farther than you’d like in order to get the best value for your money, or perhaps you’ll forgo a huge backyard to be closer to the city.
And when it comes to finances, you might find a disparity between how much you want and how much you can afford.
Home loans are made against your ability to repay. While the mortgage loan is secured against the house, it is really made against your income. That’s what mortgage lenders look for — income to offset liabilities. Simply put, the amount of income you need to purchase a house will vary by your payment comfort level, including any other monthly debt obligations you might have.
Here’s a simple formula to calculate the amount of income you’ll need to purchase a home:
(Target mortgage payment + consumer debts) ÷ .36 = Gross monthly income needed to qualify.
Most lenders limit your debt-to-income ratio (how much of your monthly income pays debt) to between 36% and 45%. As noted by Zillow, while the exact ratio varies by lender and loan type, it’s best to base your calculations on the lower end to ensure that you won’t overextend yourself financially.
So, if your target mortgage payment is $2,000 per month and you have consumer debts of $300 per month, you will need approximately $6,388 gross monthly income to offset your housing expenses and consumer obligations.
Will Owning Be (Financially) Better for Me Than Renting?
If you’re thinking about buying a home, odds are you’re currently renting. Renting does have its advantages: there’s less upfront investment, and you can move when your agreement or lease is up without having to sell. However, for most people, it’s a much better option to buy a home rather than rent it. There are several reasons for this that range from emotional (it’s your home that you can personalize) to analytical (you save more money over time by purchasing).
People often think of a home as being a roof over their head and a gathering place for friends and family. While it is both of these things, your home is also an investment. For each month you make your mortgage payment or your home value rises, it’s a bit like making another small deposit in a ‘building-form’ bank account.
Down the line, you might have the option of converting the equity you have in your home into cold, hard cash. This gives you financial flexibility. You could use the money for home repairs or improvements, but you could just as easily use it to jumpstart your child’s college fund or give your 401(k) a boost so you can retire on a beach somewhere, margarita in hand.
Do I Know What My Goal Is?
When you’re looking for a home, you’ll want to consider what your goals are. Do you want a home that is temporary, or do you want to have a place that you will stay in for a while? While it may seem silly to think of what your goals are beyond homeownership, thinking ahead to the future can help you better determine your ROI.
Most first time home buyers will buy a house that will require some renovations. But if you know what your goal is for your home, you can make safer financial investments before you start any projects. For example, if your goal is for your first home to be a long-term investment, where you see yourself staying for the next 10 years or so, you’ll want to consider what purpose your house will serve in the future. Does it include kids, or maybe future renters? Either option could involve extreme renovations, but if these changes might not reap a return in the future, it could be worth investing in other options in your home that give you an ROI in time and enjoyment over cash.
Can I Actually Handle a Home Renovation?
“A little TLC,” said the listing. “It’s awaiting your special designer’s touch, your creative flair.” “You can paint the walls any color you like.” “You can put in permanent fixtures.” “You can build a patio, a deck and remodel a bathroom if you like.”
Unfortunately, in most cases, the Property Brothers aren’t going to make these fixes, you are. The realtor can call it anything he/she wants, but most people call it what it is: work. Owning a home that needs a lot of updating is like having a part-time job that you don’t get paid for.
It’s great if you have experience doing those things or if you like that kind of work. But if neither of these statements is true, then you’re going to need to budget a lot more time (and money) for the early days of your home ownership. It’s going to be learning on the job. You’re going to be chasing guys with orange aprons up and down the aisles at Home Depot. Is that how you really envision spending your Saturdays?
If that’s your idea of fun, then buy the fixer-upper! If not, you might want to consider an option that is move-in ready and lowers maintenance.
Am I Here for the Long Haul?
We buy real estate in order to hopefully earn wealth and improve our lot in life. The most likely way that you will earn real estate wealth is by owning property for long periods of time, preferably a decade or greater. But long-term ownership does not necessarily coincide with the habits of most young people.
In your 20’s, you can barely decide what you want for dinner, much less where you want to live for an extended period of time. If you buy a property and have to sell it due to a career move in a few years, you’re most likely going to lose money on your real estate ownership. You finish school, get a job and work for a few years. Then you get the urge to backpack through Europe. That house you bought would hinder your ability to relocate, and if you did move, you’d probably lose money. According to Architectural Digest, you should aim to stay where you’re at for five years, minimum. This rule applies so that, hopefully, the market will appreciate doubling digits and you can recoup some of your purchasing costs.
So if you are young, wild and free — and not sure of your 5- to 10-year plan — you’ll probably do better as a renter for now.
When might it make sense to buy young? If you’re sure you’ll own the property a long time, then it’s probably a good idea to buy. Just make sure you can comfortably afford the payments along with all your other bills. Also if you want to be in the landlord business and plan to convert the property from a personal residence to a rental, then buying at a younger age would be a smart move for you. Just be ready to answer that “the toilet is broken” calls from your future tenants!
So ask yourself before you decide whether to buy real estate: “Do I want these keys forever or for now?”