Ready for your First Home?
So, you have a decent income, you have a job you like (or at least don’t hate), you’re sick of renting, and thoughts of homeownership have been creeping into your head. Maybe one of your parents or friends has been getting on you about not wasting your money on your apartment rent anymore. Perhaps you long to mow your own lawn. But you still just don’t know if you’re ready yet.
There are a lot of pre-qualifiers to successful homeownership. Knowing what they are is a good first step in determining if you’re ready to making that leap:
1. You plan on staying in town for at least three years (preferably five)
If you’re in a job you like, in a town you like, and see stability in your job, chances are you could see yourself sticking around for at least three years. Why 3 years? If you move sooner than that, the odds are that you’re probably going to lose money on your transaction.
Closing costs are usually at least $2,000. This doesn’t include commission that goes to the agents who worked on selling your home. I am a big advocate of selling for sale by owner (FSBO), however, many people are not. If you go with an agent, you’ll have to fork up about 6% of the selling price for their services. So, right from the moment you purchase your house, you’re about 6-7% in the hole and will have to make it up through building equity in your home (sell it for more than you bought it). This can come from hard work, or simply time for the home to appreciate in value. The outlook for the housing market is indicating that appreciation in value is not going to happen for a few years to come, so five years is more ideal than three, but there are never any guarantees.
2. You’ve run the math and have built-in other investments into your personal budget
In most cases, home ownership is going to cost more than renting (even with the tax deductions for your mortgage interest and property taxes). Run the math on what you can reasonably afford. What I’ve learned from owning two homes is that you don’t need the space you think you’ll need, especially if you don’t have children. I easily moved from a 1,500 sq. ft. home to a 1,000 sq. ft. home. I’ve actually enjoyed the smaller home because it is more liveable, cheaper to heat and cool, and easier to clean. Don’t worry about impressing your friends by buying a big house that you can’t fill.
Keep in mind that your home is not an investment. It is four walls, a sense of pride, and a way for you to build sweat equity. Any calculation you come up with should include built-in methods for saving for retirement and non-retirement accounts. If you’re banking on your house to fund your retirement, you’re incredibly misguided. Everyone has to live somewhere, and by definition if an asset is a necessity, it is not an investment.
3. You don’t have any black marks against your credit
Previously, I highlighted how you can receive three free credit reports per year. Make sure that your credit reports have a clean bill of health. Some items to look for:
- Do you have any accounts listed that you didn’t know about? Get them taken care of. Dispute any that you did not personally open.
- Close any accounts that you do not use anymore. Keep your long standing accounts open.
- Consolidate credit accounts, if you are able to.
When you start applying for loans, the mortgage institution will pull your FICO scores. Anything over 700 is considered pretty good, so don’t let someone tell you otherwise as negotiation leverage. Also worth noting is that a long credit history is overrated. I was able to get the best mortgage rates with only one year of credit history (simply, 1 credit card) behind me. However, lenders may have tightened up since then.
4. You are willing to negotiate
If you’re not, you’re going to get hammered. A general rule of thumb for a first offer is to go 10-12% below asking price. In this market, you may be able to go up to 15-20% without offending the homeowner. There will always be exceptions, but you should be able to get at least 10% off asking price.
You’d also be wise to negotiation the rate on your mortgage. Some lenders post their rates to the public and don’t bend to anyone.Â Others don’t and are willing to negotiate. Everyone is desperate for business these days, so throw around your best offers elsewhere, and see if anyone can beat them (everything else being equal).
5. You have a positive attitude towards taking ownership over things and are ready for the responsibility
It sounds silly, but I love mowing a lawn, shoveling a driveway, and painting a wall. There is a sense of pride in doing these things that is irreplaceable. I don’t expect someone who has only rented and hated doing these chores as a child being able to understand this, but it’s true. If you think this is simply not possible and the thought of doing these things sounds horrific, then home ownership is probably not right for you.
What kinds of things have prevented you from buying a house? Please do tell.