5 Questions to Ask Before Buying a Home
Five Questions You Should Ask Before Buying a Home
Question No.1: Do you have at least 20% saved for a down payment?
Experts agree that buyers should put 20% down on a home purchase. “The new rules for the new market—these are the old rules we used to follow in the 70s and 80s,” says Michael Corbett, Trulia's real estate expert. “You put 20% down, you hold the property longer term, and you don’t overspend.”
Your down payment will determine the size of your mortgage and the amount of your monthly payment. “You really want to put down enough [money] to manage a payment,” says Michael Goodman, certified public accountant and president at Wealthstream Advisors, Inc.
Question No.2: How long am I planning to live in this house?
Don’t buy unless you’re planning to stay in the property for five to seven years, says Corbett. “Really, we don’t have a lot of concrete stability yet. You want to give yourself a little bit of a safety net.”
The longer you live in your house, the more likely its value will increase.
Home price appreciation will help you recoup your initial investment when you sell.
Question No. 3: What are the true monthly costs for owning a home?
The cost of owning a home extends far beyond the monthly mortgage payments. “Add in about 30% more to cover the full price—taxes, insurance, hazard insurance depending on where you live, HOA fees for condos and general maintenance that you wouldn’t have when you’re a renter,” says Corbett.
Other expenses to consider are whether you’ll have increased commuting costs and, if you have children, whether they’ll attend private or public schools, adds Goodman.
How much you spend on your mortgage payment depends on what else you want to achieve in life, such as long term savings goals like retirement and discretionary savings goals like vacations.
Depending on your salary and goals, Goodman suggests keeping housing payments between 25% and 50% of your income, with a higher percentage of income for when your only goal is your house. When you have a larger monthly payment, find places to make cuts in your budget, he says. Even though you may want to spend more of your income on your mortgage, you still need to qualify with a lender for that payment.
There are benefits to owning that will affect your tax liability and, ultimately, your budget. “The tax impact is huge,” says Goodman. Look at your tax incentive to buy and, if you have difficulty reviewing these on your own, consider seeing an accountant to understand how your tax liability will change.
Question No. 4: Do you have an emergency fund on top of what you’ve saved for a down payment?
Goodman suggests having about six months of expenses saved before buying a home. If you have a steady income, a slightly smaller reserve would probably be sufficient with a larger reserve of more than six months of expenses being more suitable for people with unpredictable incomes.
“Your emergency reserve shouldn’t change if you buy or rent but should match expenses,” says Goodman. “You have new expenses that come up when you buy, and you have to factor all those into your budget.” As well as having a down payment and emergency fund, Goodman suggests having additional cash for renovations, projects, and moving costs.
Question No. 5: Do you have job security?
Experts suggest renting if you don’t have job stability. “The nice thing is that we’re in a safer buying environment with much more stringent lending practices,” says Corbett. “Banks have to qualify someone for worst case scenarios.”
By Andrea Murad