Mortgages

Think You’re Ready to Buy a Home?

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The value of owning a home is a matter of both means and mindset. After running the numbers to ensure you can technically afford it, you want to also make sure you desire the stable, grounded lifestyle best suited for buying versus renting.  If you view purchasing a home as purely an investment opportunity, you may be fooling yourself.

To prepare financially, give yourself at least a year to gather up the cash, income and credit you’ll need to qualify for a suitable mortgage.  Note that lenders’ standards have become stricter since the housing meltdown.  Sorry, but no more 0% financing deals. (And if some bank does offer this, RUN!)

Here’s a closer look at what you’ll need.

  • A Down-Payment. You want to have at minimum a 10% down payment. Best to have 20% in my book.  You’ll sleep better at night knowing that even if the value of your home falls 10% or 15% you can still sell it tomorrow and come out ahead. Additionally lenders will want to see that you have savings equal to at least 3-6 months of living expenses tucked away. Have your bank statements ready.
  • Proof of Income. Are you employed? Making money? Banks will want to verify proof of income and know how much you’ve made over the years. If you are self-employed, lenders will usually request two years of consistent or growing income. Have W-2s, pay stubs and tax documents on hand for this.
  • Strong Credit. The best mortgage interest rates are going to individuals with credit scores of 760-850, according to FICO, the company that administers the credit score.  Additionally, your credit report should be free of stains like past-due or late payment histories. Check your credit report at least a year before applying for a prequalification – it’s free at annualcreditreport.com. Make sure there are no mistakes. Checking in advance will ensure you have enough time to correct the mistakes or improve your score by paying down debt and paying your bills on time.

Now here are some personal questions to answer as you debate buying a home.

  • How long will I live in the home? “Think long and hard as to your career and social path,” says Kathy Braddock, a real estate broker and founder of real estate consulting firm Braddock+Purcell in New York. If you plan to move in the next 5 years, you’re probably better off renting, since it can allow you more flexibility. Plus, if you decide to sell the home in less than 5 years you risk losing money on the purchase (which should never be your prime intention when buying, but the shorter period you own a home the less likely you’ll make money when you sell it).
  • What social and psychological benefits will it offer me that renting may not? Does ownership make you feel more secure and stable? Or does it make you uneasy since you lose the flexibility of picking up and moving when you want?  Does buying a home mean living in a neighborhood with a great school district, which is comforting to you? “One could argue that there are psychological benefits to be a homeowner, just like there are to being debt-free. Owning a home brings a calm and satisfying feeling…assuming you like your home,” says Dr. Michael J. Seiler, Professor and Robert M. Stanton Chair of Real Estate and Economic Development at Old Dominion University.  And assuming you can pay your mortgage.
  • Will I be OK with the house losing value? It happens. Homes may go through periods of depreciation. While you may be able to afford the mortgage payments, does this still concern you? If it does, perhaps that means that you’re looking strictly looking at the purchase as an investment, which, again, can be a dangerous mindset to have.

Image: iStockphoto

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