Homeownership is a fundamental part of the American dream. We’re told that buying a home is one of the best financial decisions you can make, and it’s a sign that you have control over your life, or that you’ve “made it” as an adult. Yet, homeownership is at its lowest level in more than 50 years; only 62.9 percent of people are homeowners, and among Americans under 35, only 34.1 percent are homeowners.
If you think you’re ready to make the jump from renting an apartment (or a house) to buying and maintaining your own property, it’s natural to get excited and want to push forward as quickly as possible. However, there are some important things to know before you proceed.
What to Know
These are some of the most important bits of knowledge you should have before you move from renting to buying a home:
- The concept of equity. Regardless of whether you rent or own, you’ll be making monthly payments. The difference is, when you make monthly payments on your mortgage, you’ll be building equity. Home equity is a term that refers to the amount of home you actually own; when you move, you’ll sell your home, pay back whatever part of the mortgage is left, and pocket the difference. That means all your monthly payments are inherently more valuable when you buy a home, since eventually you’ll see part of that value come back.
- Down payment requirements. Few people can afford to buy a home with cash, which is why mortgages are so important. However, to get a good mortgage and make affordable payments, you’ll need a significant down payment. The typical down payment is 5 percent of the home’s value, which for a $200,000 home is $10,000. You can use a 3.5 percent down payment through FHA, or if you want more equity to start, some recommend a down payment of up to 20 percent. Think carefully about how much money you want to put down, and create a plan to save that money.
- Monthly costs in your area. Next, you need to figure out what the monthly costs in your area are. Look at how much it costs to rent a space in the area, then figure out what your monthly home payments would be. For a comparable space, does it make more economic sense on a month-to-month basis to rent or buy? Buying is often—but not always—the better answer.
- Peripheral costs. In addition to your monthly mortgage payments, you’ll need to do research to find out peripheral costs associated with your home. For example, you’ll probably be required to pay property taxes and insurance on a monthly basis, and you’ll need to know how much utilities are (such as electric and gas). If you’re currently renting, you may not be used to being responsible for all these extra costs.
- Your credit score. To be approved for the best possible mortgage rate, your credit score needs to be in good shape. You can run a free credit report once a year from each of the three credit bureaus, and determine any weak points in your credit history that need to be addressed. Unfortunately, if your credit score is in fair or poor condition, it could take months of diligence before you can improve your score to a “good” or “excellent” ranking.
- Your budget. Next, you should know approximately how much home you can afford. You have a ballpark of monthly payments you’ll be making in your chosen area, including peripheral costs like utilities, but can you really afford that? Take a look at how much money you’re making every month; the old rule dictated you should spend no more than 30 percent of your budget on housing, but in today’s market, there’s much more wiggle room, since housing costs vary dramatically from place to place.
- The importance of a home inspection. Even if a home looks great on the outside and inside, you’ll need to run a full home inspection before you finalize the deal. Work with an accredited, experienced home inspector to learn the ins and outs of your chosen home, and take note of any structural deficiencies or weak points before you follow through with your purchase; it can save you heartache down the road.
- Basic home maintenance and repairs. You’re going to be responsible for taking care of anything that goes wrong in your home, so it pays to learn some basic home maintenance and repairs skills. For example, you’ll want to learn how to change a furnace filter and learn some basic repairs like fixing a clogged toilet or installing a new light switch. Fortunately, there are lots of YouTube tutorial videos that can help you master these skills.
- Other homeowner responsibilities. Do some research, in case there are other responsibilities you’ll have as a homeowner. Some cities and neighborhoods require homeowners to keep their lawns in a certain condition or require homeowners to pay for costs associated with sidewalk repair.
- Other people. Finally, before you buy a home, get to know some other people who have bought a home in the past—and some people who can help you with repairs if and when they come up. A broad network of contacts will be able to give you a good perspective on what types of homes to look for, which ones to avoid, and how to handle problems when they come up—and you’ll save money on repairs if you meet with and work with the right people.
The Research Phase
If you have a solid understanding of all the preceding items and you still feel ready for home ownership, it’s time to enter the research phase and start looking for properties that meet your needs. This may be a fast or lengthy process, depending on how prepared you are and to an extent, how lucky you are, but it will be an easier process if you have the right people helping you.
If you’re ready for some additional support while looking for your next home, contact Green Residential today—we’ve got all the resources and expertise you need to make the best possible decision for your home purchase.