Owning a home has become a rite of passage among many Americans. Indeed, the American dream has long involved owning a cozy cottage with a white picket fence and having 2-3 kids. Owning your own home has long signified security.
But in today’s changing economy, many people lack the knowledge they need to select the right home for their budget. This sometimes leads to heartbreak as foreclosure looms. Those seeking to buy a new house would do well to evaluate the following before sitting down with the escrow agent.
1. Write Out Your Reasons for Buying
People buy homes for many reasons. Some people crave the financial security that comes with knowing they will have a place to live come retirement. Others purchase homes because they prefer to build equity with their money, not line their landlords’ pocketbooks.
Consider the emotions behind the move. The thought of finally having a real estate agent hand over the keys is exciting, but pay attention to any red flags from your subconscious. If your career may require you to move around, for example, owning a home may prove too restrictive.
Writing these thoughts down quiets the tiger of uncertainty and helps people consider their options more objectively. Additionally, such lists help in solidifying the reasons why moving is or is not right at the time.
2. Know How Much Down Payment You Have
The amount of down payment presented impacts everything from interest rates to the need to pay for mortgage insurance. Plus, the more you pay up front, the less interest you pay over the life of the mortgage.
Be wary of balloon mortgages. As bank regulations revert to the pre-2008 levels, expect to see more of these mortgages hitting the market. These loans offer a low introductory payment that shoots up dramatically after a specified period, usually two years. Applicants take such loans out of desperation but too often end up lowering, not raising, their credit scores.
3. Evaluate Your Credit
Many people practice the ostrich approach to their credit, but burying your head in the sand leads to perpetual renting. Lower credit scores result in lower interest rates as well, meaning paying less over the course of a home loan.
Missed payments impact credit, so getting current with all bills boosts credit scores significantly. Another factor that affects credit scores is the amount of debt carried compared to total household income. Many people believe this means closing credit cards and other revolving loans once paid off. However, having a large amount of unused available credit raises scores further by indicating responsible credit habits to potential mortgage lenders.
4. Pay Down Debt
Lenders prefer that housing costs make up no more than 28 percent of the average household budget. Therefore, paying down debt improves the chances of winning mortgage approval.
The type of debt carried matters as well. High-interest credit card debt weighs more heavily than do automotive or student loans. In some cases, temporarily deferring student loans can increase approval chances. While lenders still look at the total amount to be repaid, deferment can lower monthly debt at the onset making foreclosure less likely.
5. Consider All Costs
The purchase price of a home makes up only one part of the costs of ownership. In addition to monthly mortgage payments, expenses such as homeowners’ insurance, HOA fees and utility payments all add up. Those on budgets with little wiggle room may wish to opt for a small townhouse rather than a larger, single-family home to keep electric and heating bills low.
6. Scope Out the Area
Seeking a home in a good neighborhood isn’t elitist – it’s simply a sound financial move. Factors such as school quality, crime statistics and overall area upkeep all impact how much a home appreciates in value over the years. Plus those hoping to grow their families want peace of mind when their children head to play outdoors.
Are You Ready to Buy?
Buying a home requires a solid credit score, a low debt-to-income ratio and a reliable income source. Additionally, home ownership comes with a great deal of responsibility. Whether you’re seeking a condo, a townhouse or a single-family home, performing due diligence prior to making the plunge helps assure your home will bring you pride of ownership for years to come without breaking the bank.
Disclaimer: This post is sponsored by PSECU, a Pennsylvania-based credit union.