By Catherine Boyle
If you’re thinking about buying your first home, plunging into the market can be daunting. How do you know you’re ready? Is buying mostly like renting? How much money do you need? Before making such a large purchase, you want to be sure you’re ready. Here are six ways to tell that you may be ready to buy.
1. Your Finances are Stable. You need to have your financial house in order before you buy a house, especially if you need a loan. This means a steady job with a regular income, good credit and a manageable amount of debt. These three factors will weigh heavily in the type and amount of loan you’ll qualify for, as well as what interest rate you’ll receive. You should also be comfortable managing your money and you should have a substantial financial cushion. If you’re still scrambling to make rent, or if you anxiously check your bank account because you’re worried you might run out, you’re probably not ready to buy.
2. You’re Ready to Commit to One Place. The general rule of thumb is that you need to live in your new condo or house for at least five years before you recoup the transaction costs of buying. So think about the city you’re living in, the job you have and any other connections you might have. Are you ready and willing to live in one neighborhood, in one spot, for the next five years?
If you’re still footloose and can see moving across the country for the experience of it, or if your job is your life and they may transfer you, then buying is probably not for you right now. If a move comes up unexpectedly, it’s manageable; it happens all the time. But you may lose money on the transaction. So if you anticipate moving soon, don’t buy.
3. You Have a Chunk of Cash. While you don’t necessarily need to put down 20 percent, you’ll likely need some sort of down payment. And often the larger the down payment, the better the terms – and the less you’ll pay per month, as well as the less you’ll pay in interest over the life of the loan. So, whether you get the money by saving, through inheritance or as a gift from Mom and Dad, you need at least some capital before you start your search. Also, realize that transaction costs are significant (often between 3 and 5 percent of the total cost of the home) and those require cash.
4. You’re Ready for Additional Responsibility. First-time condo buyers often believe that owning is the same as renting – the only difference being that instead of paying a landlord, you’re paying a mortgage company. This is flat-out wrong. As an owner, you have much more responsibility. For example, if your refrigerator stops working, you have to find a contractor to come look at it, you have to get estimates on the repair and then you pay to get it fixed. While this may seem like an obvious difference, it’s much more effort to fix, maintain and pay for everything in your condo or house, than it is to simply rent. To get the real lowdown, check out My First Condo, which provides stories from the trenches.
5. You’re Willing to Take On Some Risk. As we’ve seen over the past decade, the housing market has its ups and downs. Generally, if you’re buying because you want to have a nice place to live while building some equity, you’ll be fine. That said, you should be aware that the value of your home can go down – and it can do so because of forces totally outside of your control. This has to be something you’re comfortable with, and it also means that it’s not a great idea to have all your assets tied up in your home.
6. You Understand the Market. While the most important thing is that you’re ready to buy, the decision to buy can’t be separated from the real estate market in your area. For example, in highly competitive markets, you may have to pay more than list price for a home. Is that something you’d be comfortable with? Does it make financial sense for you? Another thing to consider: As of this writing, mortgage interest rates are historically low, which means you can get more value for your loan. So, do some research and talk with a local real estate agent, to figure out your market and what’s right for you. For an estimate of what you can afford, use Redfin’s Home Affordability Calculator, which also shows what’s available at your price point in your ZIP code.
Buying a home is a big commitment. It’s natural and healthy to proceed cautiously. But if you feel comfortable in all six areas above, you may be ready to buy!
Catherine Boyle is a real estate agent with Redfin, a national real estate brokerage. She’s been helping her clients buy homes on Chicago’s North Side since 2005. When she’s not in search of the perfect home for her clients, Catherine enjoys hanging out with her dog in the park or at the lakefront, playground-going with her nephew and sampling Chicago’s newest restaurants.