If you've had enough of your roommate eating your leftover take-out, your absentee landlord hiking the rent year after year even though the heat barely works, or your mom asking what time you — a full-grown adult the last time you checked — will be home, you might be dreaming about buying your own place, and doing it sooner rather than later.
But how do you know if you're ready to buy a home, and whether it's a good idea? There are various rent vs. buy calculators out there (this one, from the New York Times, is probably the best) that can tell you whether, in general, buying a home makes more financial sense than renting in your area. But none of them can really make this huge decision for you.
And it is a life-changing decision. Owning a home has historically helped middle-class families build long-term wealth: The net worth of the median homeowner is an astounding 90 times that of the median renter. So why wouldn't you want to jump on board that train as soon as possible?
Hold on, Tiger. Buying a home can just as easily wreak financial havoc on your life. Millions of families lost their homes to foreclosure during the Great Recession. Five million homeowners in the U.S. are still underwater on their mortgages, meaning they owe more to the bank than their home is worth, even after a five-year increase in housing prices.
The fact is, homeownership isn't so much an investment as it is a forced savings vehicle. And despite the house flipping shows on HGTV, it is certainly not a get-rich-quick scheme. Here are some ways to gauge whether you're really ready to buy — and keep — a home.
There's a reason buying a home is often associated with "settling down." You don't need to be married or even in a relationship to buy a home, but it does help if you've hit a plateau of stability in your life. If you're planning to buy a home with a partner, make sure your relationship is on solid footing. If you're still itching to spend a year living abroad, maybe get that out of the way first. And if you (like most of us) couldn't afford a mortgage without your current paycheck, fairly assess your likelihood of getting transferred or laid off, and whether you could easily find another job in your area if that were to happen.
Ask yourself: Am I in a relationship that is ready for this level of commitment?
"I wouldn't want anyone to think you have to be married before you buy a house," says Marie Presti, a owner/broker of the Presti Group in Newton, Mass. "If you're in a solid relationship, buying a property can be great because you'll learn to work together with your finances and make decisions as a team. But you really don't want to buy a property with another person if your relationship isn't stable enough, because it's a stressful process."
You need to be prepared to stay in the home for five to seven years or more. Selling a home is crazy expensive - realtor commissions alone eat up about 5% of the sales price. And if the housing market tanks, as it's wont to do from time to time, you don't want to be forced to sell into a crisis — you want to be able to ride it out until prices recover.
So if you want to walk away with any money after a sale, you should plan on staying put for a while - or at least be confident that you could cover most or all of the mortgage by renting out the property should you be forced to move before then. "You don't want to buy a property if you don't plan to be there for five to seven years," Presti says.
Owning a home may come with some lifestyle changes as well - especially if the homes you can afford will require some work. "Some buyers I know love taking two or three vacations a year or going away every weekend all summer, and they're not quite ready yet to spend a lot of their free time working on their primary residence. And if that's the case they maybe aren't ready for a fixer-upper," Presti says. "I know many new homeowners who take the time and money they would have spent on a vacation and put it into the new house instead, and that's a smart long-term financial decision. But are you ready to give up a year or two of vacations?"
Ask yourself: Am I ready to stay in one place for five years or more? Is my career stable enough that I won't need to move around for work opportunities?
Remember that inertia is a powerful force, and as you put down roots — making neighborhood friends, sending kids to local schools, getting involved in the community - you may find it harder to pick up and leave later on. If you can't see yourself living in a place five years from now, think hard about whether buying is the right move.
Just as important, but perhaps easier to measure, is your financial readiness. If you're barely getting by as it is, a mortgage is not going to help your situation.
You need cash and credit: Buying a home is expensive, and typically reserved for those with better than average credit. While you can qualify for a mortgage with a credit score as low as 620 — or even in the 500s with an FHA loan — the lowest interest rates go to those with excellent credit. And a lower interest rate means a lower monthly payment, which means more money going toward your home and less to your lender.
"Brokers and lenders will pull all three of your credit reports and three of your scores, and use the middle numeric score," says credit expert John Ulzheimer. "The best published interest rates on mortgage loans are for people with credit scores above 760."
Nick Beser, director of housing and community development at nonprofit Guidewell Financial Solutions, recommends requesting and reviewing your Equifax, Experian, and TransUnion credit reports well before you start house hunting. "This is the information on which your credit score is based, so you may need time to dispute possible inaccuracies," he says.
Ulzheimer says a cheaper way to accomplish the same thing is to get prequalified by a lender. "They'll pull all three of your reports and scores and let you know immediately if you'd qualify and at what rates," he says. Their quote will be conditioned upon a full underwriting, he says - it's not the same as getting pre-approved - but it will give you an exact understanding of your credit quality, even more refined than buying or accessing your reports and scores online.
Meanwhile, you'll need to save up a hefty amount of cash, too — enough to cover a down payment and closing costs. While first-time buyers can typically find low-down-payment mortgage options, even 3.5% of a $300,000 house is $10,500 — not exactly chump change. Closing costs — the various bank fees and other charges due when you sign on the dotted line, such as title insurance and appraisal fees — averaged more than $2,000 in 2016.
Ask yourself: Would I qualify for a better mortgage if I spent another six months to a year saving up and building my credit?
A 100-point improvement in your credit score can save you $150 a month on a $200,000 mortgage, and nearly $60,000 in lifetime interest payments. If you can pay down some revolving debt (credit card balances) and make consistent, on-time payments for another year, you have a good shot at improving your credit score dramatically.
Meanwhile, socking away more money for a down payment can help you qualify for a better rate and avoid paying pricey private mortgage insurance (PMI), which lenders typically require on a mortgage with less than 20% down. And since you'll have to finance less of the overall purchase price, your mortgage payment will be more manageable, and you'll waste less on interest over the life of the loan.
You still need money left over. Buying a home is expensive, but so is owning one, year after year after year. Water heaters crap out, driveways need to be repaved, walls need new coats of paint. At some point, with little warning, you may have to replace the roof to the tune of $10,000 or more. You need a cash cushion to cover this stuff.
Ask yourself: If I got hit with a financial emergency - a busted hot water heater or even a job loss - would I still be able to make my mortgage?
If your down payment is actually your emergency fund, or you're taking out the biggest mortgage you can qualify for, you risk stretching yourself too thin. "Make sure you have the financial means to not only buy your home, but to stay in it as well," said Jorge Colon, program manager at The Homebuying Mentors, a program of the nonprofit Allston-Brighton Community Development Corp. in Boston.
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Sarah Korval, who with her husband Scott Wisnaskas bought a townhouse in Boston last year, cited renter's fatigue as one reason they decided to buy. "We'd had some of the challenges that you expect to find when renting: small apartments, close quarters with neighbors, and places sold out from underneath us," she says. On top of that, their furry family — two dogs and two cats — limited their rental options whenever it was time to move.
But it took a few years before they were truly ready to buy. "We'd talked about buying for some time, but we knew we wanted to stay in the Boston area rather than branch out to the suburbs - and that required saving a lot more money for a down payment," she says.
Korval says they started saving in 2010 in anticipation of "one day" buying a home, and then started visiting open houses around early 2015. "At first it was something different to do on Sundays, and there wasn't any pressure to find a place because we couldn't put in an offer anyway," she said.
Along the way, especially as home prices in Boston reached new heights, they had doubts. "Across the years, we reconsidered a few times, wondering if buying was even worth it," she said. "[But] in early 2016, we were getting fed up with our current living situation and it seemed the right time to get serious about buying. I stalked Zillow and Trulia like it was my day job."
Worth it: Taking the time for a first-time homebuyers class.
If you're similarly fed up but feeling a bit unprepared, one way to get ready is to take a first-time homebuyer course. Typically offered by affordable housing organizations or nonprofit groups, a good home buying class will walk you through the various steps of the home buying process in your state and introduce you to the dramatis personae you'll be working with (including a real estate agent, home inspector, mortgage lender, insurance agent, and real estate attorney).
In exchange for about a hundred bucks and four weeknights of our lives, my wife and I learned just about everything we could have ever wanted to know about home ownership in such a class — including the fact that we had NO BUSINESS buying a home at the time. (When you have to wait until your paycheck clears before you can make an offer on a house, because you can barely cover the good faith deposit — to say nothing of a down payment or closing costs — you're not ready to buy a home.) So we hunkered down for another year, and ramped up our savings.
Once you're really ready, then it's time to get your ducks in a row.
That means gathering recent pay stubs, tax returns, auto and student loan statements, credit card bills, and bank information and getting pre-approved by a lender. A loan officer can't tell you if you're emotionally prepared to buy a home, but they'll have no trouble telling you if you're not financially ready.
"One of the things we tell people is they should have a preapproval on hand. That's one of the more important things when they're looking at properties," said Colon. "That shows the seller that they're serious about the purchase and they have the means to do it."
Because while you might finally feel ready to buy a home, a seller's not going to just take your word for it.