Editor’s Note: Many of you write in asking if you’re ready to buy a home. Others have asked if rental real estate makes a good investment, which we will get into in two upcoming posts. If you’re a happy renter, know that we’re not unduly glorifying real estate ownership. But because so many readers are already considering this leap—either for personal or investment reasons—this content continues to be important. –David
If you’ve read a newspaper or turned on the news in the past year you know that interest rates are low right now; interest rates could rise significantly before the end of 2014.
If this happens, it will be far more expensive to get a home loan. Logic may tell you that if the interest rates are probably going to go up within two years, buying a home in the next two years should be on your “to do” list. But even if low interest rates and great housing prices remain the norm for the next couple of years, you should weigh these external factors with internal factors—such as your goals and current financial situation—before making the decision to buy.
One way to answer the question “are you ready to buy a home” is to reverse the question. When is it not time for you to buy a home? Some examples:
- Uncertain employment. When you or your spouse have a job environment that is insecure, such as inconsistent hours at work or the possibility of relocation.
- A turbulent relationship. If you’re in a new relationship or, God forbid, thinking about splitting or divorcing. (As crazy as it sounds, I’ve taken couples contemplating divorce house hunting.)
- The wrong motivation. When your motivation to buy a home is, for example, because “all of your friends are doing it”.
Here are four questions to ask yourself to see if the time is right for you to buy a house:
1. Are Your Finances (Really) In Order?
Before you even make an offer, you’ll need to get mortgage pre-approval. To do that, you must meet some minimum financial requirements. For example, you’ll need:
- Established credit and a decent credit score.
- Money saved for a down payment, closing costs, and reserves.
- Proof of steady income for at least two years.
- Any other debt (like credit cards) under control.
The bank won’t give you a loan if you don’t meet these criteria, but savvy buyers will see these minimum requirements for what they are—minimums.
Buyers with the best credit scores, for example, pay tens of thousands less in interest than buyers with merely average credit. If you’re smart, you’ll also want cash left over after the closing as an emergency fund.
Finally, even if the bank “qualifies” you to buy a $400,000 home, that doesn’t mean you should. Lenders may let you take on loans with payments of up to 35% your gross monthly income. But after you’ve paid taxes and that big housing payment, you won’t have much left to buy other neccessities or save.
2. Is This a Good Five Year Plan?
Before you buy a house, ask yourself: Where do you see yourself in five years? Might you relocate for work or to try out another city? If so, think carefully about buying real estate as you may have a hard time recouping broker commissions and closing costs.
Do you plan on getting married or having (more) kids? If so, that doesn’t necessarily mean you shouldn’t buy a house, but you need to factor that into the type of house you buy. A one bedroom condo probably isn’t a great idea for most newlyweds; because if a baby comes along they’ll want to move.
Don’t settle on buying something that might restrict you in your future, even if it’s the only thing you can afford. After all, it would be better for a family of three to comfortably rent a two bedroom than miserably own a one bedroom.
3. What’s Your Real Motivation?
Your motivation to buy a house should not come from anybody but yourself. Often, people start house hunting because they want to keep up with their friends or because their parents told them they should own a home. Buying a house isn’t just a big financial commitment, it’s a labor of love that takes time and effort; if you’re not in it for the right reasons, it’s going to make you less happy, not more so.
The best reason to buy a home is because you’re looking for a place to settle into for a long time, perhaps raise a family, and invest not just your money but your sweat into a place that will become “home”.
4. Are You Overly Anxious?
If you feel like you’re under pressure to buy a home (either from yourself or somebody else), be careful! Smart buyers know finding the right house may take time, often many months. You may be excited now to get into the first home in your desired zip code and price range, but you’ll be happier in the long-run if you wait for the best home you can find.
If you can comfortably afford to buy a home, want to own a home, and you can envision at least five years there, go ahead and contact a real estate agent in your area to start talking about what kind of houses you’d like to see. Otherwise there’s nothing wrong with renting!