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Is It Your Time To Buy A House? Four Questions To Ask Yourself


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

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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:

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.

Recap

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!

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. What does steady income for at least 2 years mean? My husband and I were thinking of buying a home within a year of us finishing our graduate degrees, so our length of employment at our first post-grad jobs will be fairly short. Would that prevent us from getting a loan? Or would our employment status during grad school work in our favor even though our wages were quite a bit lower?

    • NorthernVirginia says:

      We just bought a house in November, they bank wants to see W-2’s going back 2 years.

    • David Weliver says:

      It depends on the bank, although what I understand is that if you’ve been working for the same employer for two years, your application won’t raise any red flags. I was at mine more than one year but less than two when I bought a home. And certain lenders may very well be OK with somebody who has just landed a new job in their field as long as it’s full-time and permanent.

      Freelancers and contract workers have a tougher time getting mortgage approval for this reason and often have to show two years of tax returns to document income.

    • Emily,

      You can get around this by showing your lender (depending on the lender) that your area of study was in your current field of employment. For example, if you were studying to be a teacher for the past four years and you now have a full-time teaching job.

      Make sure to get clarification from your lender and their underwriting department before making offers.

      I hope that helps.

      AG

  2. I’d say you need to be sure you want to live in your newly purchased home LONGER than just five years. Otherwise, you might be better off renting.

  3. Agree with Bethy, when I finally do buy a home, it’s because I plan on living for there for at least 10 years!

    Good post, enjoyed it.

    –Mike

  4. Thanks for the information.

    Keep it up in future also.

    Thanks
    Michael

  5. How about if your military. We move about every 3 years. My main reason of wanting to buy is as a investment. Once i move away i would try and rent the place out. I make about $45,000 a year after taxes. I’m looking at spending around $80K-120K on a 2-3 bedroom 2 bath house. Which on a 15 year loan is around $700-900 a month and is only around 20-25% of my income. Of course that does not inculde taxes and insurance. But that is pretty cheap where i am at. The only debt we have is $8,200 car loan and I owe my car. So would this be a smart move on our part even though we would be moving in about 3 years? I just figure why not buy when the prices are good for a long term investment. Also the loan would only be a 15 year loan. That means i would own the home by the time i turn 42. I want to get a couple of houses and keep doing this and make money off of renting them and the value hopefully going up. I would hire a renting managment company for around 7%-10% of the rent when i left this property