Every single individual on this planet has their own unique circumstances. There is no way for someone to offer you the prefect advice when it comes to making major life choices. There is no formula – just your gut, but there is a bit of advice that can be offered up. This is just advice, though, not an answer.
First, ask yourself if you really want to buy a house. Is it something you’re being pressured into, either by some person or the clockwork march of time moving forward, or is it something you genuinely want to work for and accomplish for yourself?
To help with the decision, take a look at your financial situation. Are you in a position where you can afford a house? First, you need a down payment, which is going to cost you five digits at the least. Then you have to pay your mortgage every month, as well as electricity, gas, water, cable and internet, buying food, any repairs, painting and decorating, and more. If you’re fresh out of college carrying the weight of a hefty five digits worth of debt, you should maybe hold off on a house for a while.
Another reason to hold off on a house if you’re a fresh graduate is because of the commitment it represents. You’ve only just got your degree, so chances are, you don’t even have a good enough job to shoulder the financial burden anyways. And if you do, what if that freshly budding career requires you to relocate? It’s going to take quite a lot of time before you can sell the house to barely break even on it, so if you buy one, you’re in for the long haul.
You also need to get rid of any notion that buying a home is going to save you money or stop you “wasting money on rent.” If only it was that simple. Rent and mortgages tend to be proportional to each other depending on the area, and even if a mortgage turns out to be cheaper than rent, you still need to factor all the other costs of a house into it too.
When you’re living in your own home, you don’t have any landlord to absorb a bunch of those expenses and maintain that living space – you’re on your own. That means furniture and redecoration, staying on top of bills, and maintaining the house’s condition. Your regular expenses include much more than just a mortgage, so it may end up being far more expensive than rent on a month to month basis.
There is the upside to that though, and that is the fact that your mortgage repayments are not just throwing money into a black hole like rent is. When you pay those repayments, you’re building equity in that property that can make you all kinds of money in the future. Or you can get to the point where there are no more repayments, and it’s all yours.
Money isn’t the only resource you’re going to have to sink into a home though; in fact, it’s not even the most valuable one. That honor is reserved for time and not just the time it takes to shop around, pick a home, decorate it, and finalize the paperwork. You need to keep on top of your holdings, so sweeping the floor, scrubbing the decking, cleaning the roof, clearing the gutters, and mowing the grass are all responsibilities you’ll have to take on. You’re going to be domesticated, so ask yourself if you’re ready for that kind of lifestyle.
There are positives and negatives to each, so just give it some thought. You could run a cost-benefit analysis on buying a house if you still aren’t sure.
Can You Afford a Loan?
When it comes to actually budgeting for your dream house, the most important financial figure to keep in mind is your monthly repayments. The best way to calculate how much you can afford is to do a debt to income ratio. This involves dividing your total debt repayments per month into your total earnings per month. The result is a decimal number that is the percentage of your income going to debt each month. Most advisors tell you to keep it under 36%, but even that is a bit high, leaving little to no room for emergencies, saving, and the rest of it.
So trust yourself and those with your interests in mind when it comes to how much you can afford to repay monthly. Don’t be optimistic or hopeful here; you need to be realistic. Otherwise, you could end up in a world of financial hurt.
After that, you can take advantage of many of the online mortgage calculators that tell you what price you can afford on a house and the possible interest rates available to you.
What’s Your Credit Score?
Before you go knocking on the bank’s door to ask them for several hundred thousand dollars, you’re going to need a good looking credit score. It’s generally a good thing to consciously get your credit score in shape regardless, but for buying a home, it’s particularly important. Not only is it necessary for you to be approved for the loan in the first place, but it will determine what kind of interest rate you’ll be paying for the next few decades.
There are plenty of places online that offer free credit scores, like Experian or Credit Karma, so look one of them up and ask to see that all-important number. Alternatively, you could dish out the cash for a full credit report, which may be a good idea the closer you get to that mortgage. Either way, you’re going to want to get your credit score in shape before you apply for one. There are plenty of ways to boost your score – things like never missing or being late on a payment, leaving your old accounts open, using your credit wisely, fixing any errors on your report, and so on.
Saving for a High Down Payment
While you’re working on your credit score, it’s a good idea to start implementing a savings plan for the down payment. The banks currently offer low down payment options on mortgages, but as a rule of thumb, you should save a solid 20%.
There are a few main reasons to do so. Firstly, it’s going to help save you from going underwater because the more money you put into the house upfront, the less mortgage you’ll ultimately have left to pay off. Aside from that, it’s going to save you money in the form of not having to pay private mortgage insurance. This is an insurance that you are required to pay until you have 20% percent of the house paid off. Banks force it on you because it protects their investment if you happen to be unable to pay. It stops at 20%, so going in at that amount means you never have to put a cent to it.
Once that hefty chunk of change has been saved up and you have reserves for the million and one other things that you’re going to need to do in the house, you may think you’re good to go. But you would be wrong. There are also closing costs to save up for. These fees are quite substantial too and can fall anywhere in and around seven percent. You have the option of rolling some of the fees into your mortgage, but you just want to pay them with cash if you can. Alternatively, if you have a particularly nice seller, you could ask them to pay part of the fees out of the money they made from the purchase. They don’t have to, but some may choose to.
Breakdown of Mortgages
It isn’t as simple as walking in and asking for a mortgage though. When it comes to loans of this size, there is some terminology you need to know and decisions you need to make.
Fixed-Rate vs. ARM
This option relates to the interest you’re going to pay. A fixed-rate mortgage is the more common of the two, as well as the simpler. Essentially, it means your repayments are always going to be the same regardless of circumstance. It’s a reliable option and allows you to plan very well for it. You can change the rate if you refinance the loan, but otherwise, it’s going to stay the same.
ARM loans are a little complicated, and there are a few different types. Rather than fixed repayments, your repayments are going to vary based on an external index, specifically, your interest rate. This means that, as the index rises and falls, so too does your mortgage.
There are other types of mortgages and hybrids between fixed-rate and ARM, but the two individually are the most popular options.
15 Year vs. 30 Year Term
Again, the actual options relating to this varies, but these are the most popular terms. These are the amounts of time it’s going to take you to pay off the mortgage if you only make minimum payments.
Each has its advantages. In a 15-year term, the interest is lower because there is generally less risk involved for the lender, but the monthly repayments are larger, giving you less room to breathe.
On the opposite side of that, the interest in a 30-year term is higher, but your monthly repayments are lower, so you have more maneuverability in your budget.
30-years are more common, but 15-years are a great choice for those who want to get out of debt quickly and can shoulder the financial responsibility.
If you’re in a situation where you have a bad credit score or can’t save a down payment but still want a house, there is an alternative option open to you.
Government Insured Loans
Mortgage loans are huge sums of money, making them very risky for a lender. However, people owning homes is vital to a country’s economy and culture. Due to this, the government has seen fit to insure certain types of mortgages to give you a helping hand to get one.
There are more restrictions on these kinds of loans compared to traditional ones. For example, you aren’t going to be allowed to buy a house that’s considered expensive compared to the other houses in the area that you live, among other rules you’re going to have to follow.
Conventional loans are usually your better choice if you have the option. It’s cheaper, and there are fewer rules, but it’s also harder to get one.
Looking for a Home
Now that all the financial stuff is out of the way, you can start thinking about what you want from your house. Make a list of things that are vital to you, and don’t settle for anything less. Consider things like how long you’re planning on living in this home, how many bedrooms and bathrooms you want/need, air conditioning and heating, if it has a garage, how many storie, the quality of the local schools and shopping districts, the size of the yard, and so on.
Just make sure to separate your needs from your wants on your list. Otherwise, you’re going to end up spending far too much time shopping around, miserable at the fact that no one house ticks all the boxes. Remember, you can also add extensions on and do all sorts of stuff after the fact, too.
Buying the House
Next up is buying the house. Your first step in this process should be to get preapproved for a mortgage. This is just paperwork that states you are going to be approved for a mortgage when you apply for it; there is no commitment yet. Having this just puts you in a stronger negotiating position with sellers while your shopping around for your new home.
It’s not just sellers you need to shop around for though; it’s also lenders. When you first apply for a mortgage, a lender should give you a good faith estimate. This is an estimate that calculates approximately how much the whole ordeal is going to cost you, closing fees included. These can vary wildly from lender to lender, so visit different banks to see what options are right for you.
After that, you want to get a realtor on board to help with the shopping and negotiation processes. Once you and your trusty realtor ally find a home you want, you need to negotiate for it with the seller. There is an art form to the negotiations here. If you open too big, you lose your position to negotiate, but if you open too small, you risk getting outbid by another potential buyer.
This is where having a realtor really comes in handy. Let them do all the negotiating between the seller’s realtor, representing you. You need to be fully open with them about your restrictions and financial limits.
Tell them what you’re willing and not willing to settle for. Don’t mind buying a fixer-upper for a lower price? Or perhaps you don’t want to do any DIY housework but are willing to pay more if the seller gets it fixed beforehand? Inform them of this.
The process of making an offer on a house is actually a bit tricky. You type it out on paper, including the price you’re offering and any additional terms you want to be met. Your realtor delivers it to the seller’s realtor, who then accepts, declines, or makes a counteroffer. This process continues until either you back out of the deal or one of you accepts the other’s terms.
You have to keep in mind that this proceeding is overseen by federal bodies, and any offer you make on a house is legally binding, so don’t make an offer you don’t plan to accept. To get around things like this, you could include things in the letter like the offer is pending based on inspection of the home. If you arrive at it and find faults and issues, you can back out easily and with no penalties.
Also, know that, when you make an offer, you need to include what is known as earnest money to let the seller know you’re serious. This is a deposit held by the seller in escrow until either you back out of the deal, forfeit it through pre-stated circumstance, or the deal is closed.