Buying a house is one of the biggest decisions an individual or couple can make in their lives. It’s a decision that entails significant risk and reward, which can affect your life years down the line. In fact, many Americans end up paying off their house for 30+ years. Now, it goes without saying that you must do your homework prior to taking out a loan for a house. If you don’t, you could end up stuck, both geographically and financially, for a long time.
Here are 3 things to consider prior to making your first big housing commitment:
- The real estate market:
Buy low, sell high. A common saying, and obviously much easier said than done. Even real estate professionals have a hard time predicting the ebb and flow of the housing market. Although it isn’t possible to buy at the best possible time (okay, maybe some people get lucky), there are two major factors to consider.
- Pricing trends: If housing prices are significantly higher where you’re looking to buy today than they were in the past (say, a year ago), it’s probably not the best time to buy. Look carefully at the historical data and try to avoid buying in a seller’s market. Websites like Zillow have the data you need to make an educated decision.
- Compare local housing prices to income and employment levels: If housing prices are abnormally high in relation to income and employment levels in a certain area, they are likely going to fall in the near future. The National Realtors Association provides information on home affordability in order to give you, the buyer, a better idea of the market you’re getting into.
- Thoroughly compare renting versus buying:
Factor in all additional costs and potential inconveniences when you consider renting versus buying. For example, home ownership will also include: mortgage payments, real estate taxes, and homeowners’ insurance. Zillow and similar websites offer price-to-rent ratio calculators, so buyers can get an idea of how much more or less they’ll be spending as a homeowner.
- Take a close look at your personal finances:
Lastly, and most importantly, it’s critical that you take a close, objective look at your own financial health before purchasing a house. Of course, the housing market plays a big role in your decision to buy; but, the most important factor is your own financial well-being. If that’s not in order, well, nothing else really matters. How exactly should you evaluate your finances before buying a home? Here are a few ideas experts recommend:
- Limit housing costs to less than 30% of your income. Yes, your housing payments can technically exceed this number, but oftentimes it’s nearly impossible to save for retirement or afford other things (like car payments and an occasional vacation) if your housing payments are chewing up such a large portion of your income.
- Be ready for the down payment. The median down payment for a home in 2017 was 10%, according to the National Realtors Association. Although feasible, down payments less than 20% are riskier than down payments of 20% or more. Down payments less than 20% require the buyer to pay private mortgage insurance (PMI). PMI protects your lender in the case that you foreclose on your house. PMI is costly for homeowners (thousands of dollars per year) and risky if there are interest rate fluctuations. In short: wait until you can afford the 20% down payment.
- Factor in other outstanding debt. If you already have substantial debt, it isn’t wise to get into a long-term housing contract. In fact, there’s a good chance you won’t even qualify for a loan if your debt-to-income ratio (i.e. your total monthly debt expenses divided by monthly income) is greater than 43%. So get those student loans and car payments whittled down as much as possible before taking out a loan for a house!
Buying a house is a serious decision with long-term impact for you and your family. If you are in the process of searching for a home, be sure to 1) research the current state of the housing market (both national and local) 2) carefully weigh the pros and cons of renting versus buying and decide which fits your lifestyle best and 3) take a close look at your own financial health to determine if you’re truly ready to make the kind of commitment necessary to purchase a house.