- Can You Afford It?
No matter how much you want to be in the real estate game, if you don’t have enough money then you should stay away. Don’t drown yourself in house debt. At Ali Safavi Real Estate this is the very first thing we consider. When examining your current financial state, you must answer two questions:
- Do I Have Enough For A Down Payment?Ideally, you need to be able to put down at least 20% of the cost of the home. Buying a house without a down payment is risky for the bank and for you, since you could end up owing more than the home is worth if property values fall.
- Can I Afford the Monthly Payments (Mortgage)?You have probably already considered how much you can afford to pay per month. However, be weary if you have an adjustable rate mortgage. These can change and if you were barely making it before you could get screwed. Also remember you are on the hook for property taxes.
So, why have people taken adjustable rate mortgages? Usually it is because their initial interest rate was lower – making it seem like they could afford the mortgage when they really could not. Don’t fall into this trap. If you need some type of creative financing to afford your house, then you simply can’t afford it.
- Do You Have Rocky Finances?
Stability is key when you are looking to secure a loan. If you are between jobs or considering a career change, you may want to delay. Banks and mortgage lenders typically require you to have been with your employer for at least a year or two before they will consider you for a loan.
Make sure you have an emergency fund. At Ali Safavi Real Estate we always tell investors to have at least 3 months of rent and bills in the bank in case of an emergency. That padding will give you pieces of mind that you’ll be thankful for if times get touch.
An emergency fund can also come in handy to help you to bear all of the unexpected costs that come along with being a homeowner. For instance, having cash set aside for repairs is essential, since you will not have a landlord to call when something goes wrong.
- Your Credit Score
Most young people give very little thought to their credit score because, why should they? It has very little effect on their lives. Of course that all changes as an adult. Now that debt and those missed payments are haunting your dreams. Credit is one of the most important factors when buying a home. Your credit score determines whether a mortgage lender will give you a loan at all, as well as the rate. A low credit score can result in a significantly higher interest rate, which means that you will pay thousands (or hundreds of thousands) more over the life of the loan.
You don’t have to have super amazing credit. Typically, you need a credit score above 720 in order to get the most advantageous rates. If your score is lower, consider waiting a while to buy a house as you try to improve it. One tip that has worked great for clients is consolidating your debts into a credit union loan. You then can have a fixed amount of time to pay it off, and it doesn’t affect your credit. The interest rate is also much lower.
Over time, with responsible borrowing behavior, old negatives on your report will have less of an impact, your score will go up, and you will be ready to purchase a home at a better rate.
- Your Commitment to Staying in One Place
Investing in a house is expensive. It’s also hard to actually make money on a home unless you stay in it for a while – experts recommend 3-5 years. There are closing costs associated with your mortgage, which can total several thousand dollars. Once you are in the home, most of the initial mortgage payments go toward paying interest on the loan, rather than paying down the loan balance. Then when you want to sell, real estate agents take a nice chunk out of your profit as well.
With all of these costs, it is very difficult – if not impossible – to make money on a home unless you plan to stay in it for a while. Until recently, many experts recommended that you plan to stay put for at least two years if you are going to buy a home. However, because of an uncertain real estate market and uncertain property values, this estimate has been revised to suggest that you refrain from buying unless you plan to stay put for at least three to five years. If you aren’t committed to staying in one place for that duration, now is not the time to buy.
- The Current Real Estate and Credit Market
While this factor may not be as crucial as the other considerations, you still need to consider it. Look at the current interest rates, and consider the experts’ opinions as to whether property values are on the rise, or are likely to fall.
- If interest rates are at record lows, it may be a good time to buy, as you will pay a reduced cost for the privilege of borrowing money.
- If property values are on the decline, it may be a good time to wait as you could end up getting a better deal on the same type of home in just a few months’ time.
It can be very hard to accurately predict what interest rates or property values will do, so these shouldn’t be deciding factors – but they are worth considering.