In this article:
There are three key questions you should ask yourself when you’re a first time home buyer”
- “Do I have a steady job and reliable income?”
- “Is my credit history reasonable?”
- “Do I have money saved up for more than just my down payment?”
If you can answer all three questions with “yes,” it may be time to consider homeownership.
“Do I have a steady job and reliable income?”
Before you choose to buy a home, you’ll want to be reasonably certain that you can make its monthly payment.
You can’t know for sure that your job or income won’t change — life happens, after all — but an objective analysis will go a long way.
For example, if you’re planning to leave your full-time job in favor of self-employment, be aware that such a switch may be trickier than it appears.
The risks of becoming self-employed actually, are why mortgage lenders want to see at least one year of income with you in your new role, and sometimes two.
Like new restaurants, many new businesses fail.
Additionally, if you know that this new role will cause a guaranteed income setback, this, too, affects stability.
Attorneys who become partners in their respective firms sometimes miss this point. Yes, your overall annual income is likely to increase in your new role, but your guaranteed salary is taking a hit.
“Is my credit history reasonable?”
You don’t need perfect credit to purchase a home. In fact, you don’t even need great credit.
Despite a history of bankruptcy, foreclosure, or short sale, you can get approved for a mortgage with a lender. However, your credit history has to be reasonable.
When considering your credit history, ignore the blemishes of your long-ago past. What happened five or ten years ago is ancient history.
What matters is how you’re managing your credit today.
If in the last six-to-12 months, you’ve kept credit card balances well below their limits, paid your creditors on time, and not added new accounts, you’re managing your credit well. Your FICO (credit scores) should rise during this time.
It’s your most recent credit history that affects your credit score the most. Good behavior pushes your score higher, poor behavior moves your score lower.
Before buying a home, make sure you have a handle on the debt you carry already. The experience of homeownership is often marred for homeowners who are overloaded with bills.
“Am I prepared for homeownership?”
When you’re thinking of buying a home, it’s important to think about your down payment — even if your plan is to use 100 percent financing.
This is because thinking about a down payment forces you to think about your savings and, as a homeowner, you’re going to need your savings.
It’s often overlooked that the cost of homeownership ranges higher than just your monthly payment. There are real estate taxes to pay, homeowners insurance bills to cover and, like with the homes you’ve rented in your life, things break.
Homes can be expensive to maintain — even the new ones.
As a homeowner, you should plan to set aside 1.5 percent of your home’s value each year to cover the costs of maintenance and repairs. Some years, you will just a portion of what you’ve earmarked. Other years, you’ll use all of it.
You should also make sure that your household savings accounts hold at least six months’ worth of living expenses, and preferably, twelve. Job loss and illness can affect your household income, which can affect your ability to make payments on your home.
It’s important that you’ve set aside savings.
Did you decide that you’re ready?
Home values are their highest of the decade and are expected to climb. Considering that interest rates remain near historic lows, today could be a great day to become a new homeowner.