Tuesday, September 15, 2015

Housing 101: When to Buy

Unless you live in a cave you've surely heard the advertisements about the "historically low interest rates" for buying a house. And that's mostly true -- rates are quite low after the 2008 housing shenanigans. But, does that necessarily mean it's a good time to buy a house for you? There are a lot of financial factors that first-time homebuyers often forget, or were never aware of to begin with. Renting often makes financial sense, despite the higher monthly payment. So, when is it time to consider buying a house?

First, ascertain if you can even buy a house. A credit score of 660 or above can usually get a fair loan, provided you have a solid job history -- meaning you've had a stable, well-paying job for at least a year or two. Lenders also like to see a debt-to-income ratio (DTI) of around 36 percent (including the mortgage) with the mortgage taking up about 28 percent of your total income. This is somewhat flexible, but if you're in the 45 percent or more range, it's probably better to eliminate some debt first and raise your credit score in the process.

If you meet these criteria, there's still more to consider. Can you afford a down payment of ten percent? If you can't, there are programs out there that allow you to purchase a house without a down payment, provided you meet the credit criteria, but it's always best to make a down payment, as you'll pay thousands less down the road. If you don't have at least ten percent down in savings, the chances are you are not ready to buy a house -- even if you can qualify. Being able to buy a house and being financially responsible or financially sound enough to buy a house are not synonymous. Be honest with yourself here -- no one will reap the benefits or pay the price but you.

In addition to the down payment, maintenance costs can be significantly higher. Many older houses have quirks and damage that you may not notice until after it's yours -- even with a thorough inspection. If your air conditioning goes out, can you afford a $300 service call and still make your mortgage and car payments? If your hot water heater tanks (pun intended) can you swing $400 for a new one? Once you move in, you'll likely want to paint, maybe put some carpet in and buy a lawn chair or two. These obviously aren't free, and it's best practice to double what you think you'll spend on these. Most houses won't come with appliances, but most apartments and duplexes do -- so if you're a first time homeowner, it's not uncommon to spend several thousand on a refrigerator, washer and dryer -- and putting this on credit is a huge financial mistake.

Buying a house has a ton of benefits -- you can change it to what suits you and build equity in something valuable and keep it years after it's paid off. But before you buy, be sure that it makes smart financial sense. If not, calling a landlord to repair the heater is much more preferable than living without heat until you can afford a service call.

Photo by Nan Palmero via cc.

By Mark Bayley Copyright 2015 brass Media, Inc.

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