You and your family have been renting a house for a couple of years. All your friends and family keep telling you to stop throwing your money away and buy a home. Plus they say there are tax advantages too. Owning a home is the American dream.
So why not go buy one!
Maybe you already own a nice home. But you and your family want to move up to get more space. This next step is also part of the American dream. A starter house is purchased and then it is time to move out and up.
Regardless of the scenario, I strongly suggest that it is time to develop a “Homeowner’s Affordability Check List.” Preferably this should be done before you even look at one house. Once you mentally begin to take possession of a home, self-discipline, reason and logical planning often go out the window.
Buying a property is the biggest financial decision you will make in your life. The consequences of picking a house you cannot afford may well be life changing. Foreclosure is the worst outcome. Living by the skin of your teeth financially month to month is no picnic and certainly must be avoided at all costs.
Affordability Check List for First Time Buyer and Move Up Home Buyers:
1. Meet with your accountant (or get one) and see if it is possible to itemize your tax returns so you can deduct mortgage interest.
2. Review your family’s last five years of W-2 statements. Is your income trending up, down, or remaining about the same? It should be trending upwards! If one member of your family loses their income, can you survive?
3. Compare your rent, or existing mortgage, payment with a new potential mortgage obligation. How much of your net income have you been using to pay your rent or loan? Have you been able to save any money?
4. Plan on using no more than a third of your net income, preferably less, for a new full mortgage payment (principal, interest, taxes, and insurance).
5. Have you thought of creating a safety net fund solely dedicated to paying your mortgage and other living expenses so you can survive any number of life events?
6. Get your credit checked for any glaring inconsistencies. Even FHA loans require a credit score of about 700 these days and conventional loans around 740. If your credit needs to be repaired, start early and work with a professional. Plus remember FHA loans have two different types of mortgage insurance, up front and monthly, that you should budget into your calculations.
7. Do you have enough money saved up for a down payment, plus closing costs? Conventional loans require a 20% down payment and FHA five percent. Closing costs can run another five to ten percent of the purchase price for your new home.
8. How many children do you have? You might be surprised to learn that a child born last year costs on average $241,000 over the next 18 years (see link).
CNN Money Article
9. Make a realistic budget for home repairs. You know they are inevitable so why act like they are not. Also, find out all the costs associated with where you want to live in terms of homeowner association and/or condo fees.
10. How long do you plan on living in your new home? Make a plan now and be proactive instead of going by the seat of your pants.
Last, after you complete this check list, then go find a qualified realtor and loan officer. Interview several and find someone you trust. Set expectations up front with them about what type of house you are looking to buy and the frequency of communication you expect from them.
I strongly recommend that you do not get pre-approved for a loan. Those exercises are not even worth the paper they are written on. A good loan officer can tell any listing agent, without divulging your private financial data or information about your loan (both illegal if shared), your ability to get a mortgage. Let’s not forget the house you seek to buy is part of the equation. It too must conform to certain lending and safety standards.
If you have any questions, feel free to contact me via email. I am happy to advise. Buying a new home is a great step to take in life but it takes a realistic plan to live in one that you can afford.