Are you ready to buy a home? With housing prices and mortgage
rates as low as they are, many are tempted to take the plunge and
become first-time homeowners. But how do you know if you're truly
1 - Can you afford it?
Being able to afford a home is more than simply having enough
income to cover the mortgage payments. You also have to be able to
afford the upkeep on the property, which tends to be more costly
than first-time homeowners expect, and have enough of a reserve to
handle occasional major expenses - such as a new furnace or roof -
which can crop up unexpectedly.
You also have to be able to afford other unexpected expenses as
well. Many foreclosures occur after the homeowner was hit with
medical bills or other major expenses. A slow drip of lesser bills
- like auto repairs, plumbing calls, a worn-out appliance - can
also accumulate into a financial crisis when you have a mortgage to
Most people with a steady job can afford the mortgage payment on
a home of some sort. But can you afford the payment on a home
that's adequate for your needs? Beware of getting caught-up in
bargain deals - that fixer-upper could need a lot more work (and
additional money!) than you anticipated or the neighborhood around
that little gem could be much less desirable that you initially
A home is something you'll have for a long time - you don't want
to scrimp on one, but you don't want to stretch your budget either.
If you have to do one or the other, you're probably not ready for
2 - Can you make a down payment?
Coming up with a down payment is a major obstacle for many
potential homebuyers. Fortunately, it doesn't have to be as big a
hurdle as you may think.
The conservative approach is to make a down payment of at least
20 percent of the price of the home. That will get you the best
interest rates on a mortgage, will allow you to avoid paying
additional monthly fees for mortgage insurance and will provide a
financial cushion against possible declines in the value of your
Most first-time homebuyers would be hard-pressed to come up with
20 percent down, however. That's ok. You can still get a
conventional mortgage with 5 percent down if you have good credit
and the home you've selected is in a neighborhood with stable
property values, or 10 percent down if your credit is less than
perfect. And you can get an FHA home loan with as little as 3.5
percent down, even with blemished credit.
The downside of buying a home with a small down payment is that
you'll end up paying more in interest and mortgage insurance than
you would if you put 20 percent down. But if it still makes
financial sense, it's perfectly ok to buy a home with a small down
3 - How's your credit?
A big issue for prospective homeowners is what kind of credit
they have. While you can certainly qualify for a mortgage with
flawed credit, a lower credit score means you'll pay a higher
interest rate - sometimes, quite a bit more that someone with
These days, perfect credit usually means a FICO credit score of
740 and above. A score of 700-720 means you shouldn't have much
trouble qualifying for a loan, but will probably pay a bit more in
interest - maybe an additional one-eighth to one-quarter of a
percent on your rate.
Once your score drops below 700, however, things start getting
more difficult and expensive. You can still qualify with a score of
680, depending on other factors, but your interest rate will be
significantly higher than for borrowers with unblemished credit.
Interest rates climb rapidly as your score sinks below 680 and
qualifying gets much harder. You may be able to get a mortgage from
some lenders with a score of 620, but expect to pay a fairly high
interest rate if you do.
To check your FICO scores, you can order them through
; there is a cost involved in getting the actual scores. Before
doing that, it's a good idea to get your credit reports that the
scores are based on and check them for errors - you're entitled to
a free annual copy from each of the three major credit reporting
companies and can order those through
, the official web site.
If your credit scores are weak, you may want to wait for your
credit to improve before buying a home. The impact of minor
blemishes, such as an occasional late payment, begins to fade after
two years; more serious ones can stay with you for four to
4 - Will it fit your lifestyle?
This is something that surprisingly many people overlook. Are
you cut out to be a homeowner in the first place? This isn't a
question about finances, it's about your lifestyle and how you want
to spend your time.
Owning a home takes a lot of work. When something breaks, you
have to fix it or make arrangements for a professional to come in
and fix it. You're responsible for mowing the lawn, cleaning the
gutters, shoveling the snow and all the other chores that apartment
dwellers typically don't have to worry about. Even if you hire
someone else to do these tasks, you still have to take on a
managerial role in deciding whom to hire, when these tasks will be
done and which ones take top priority.
Many people simply don't want to deal with this, even if they
can afford it. They'd rather spend their free time playing golf or
in some other activity, rather than devoting it to home
If you're looking for a low-maintenance lifestyle but still want
the advantages of home ownership, a condominium can offer a good
compromise. With a condo, the homeowner's association takes care of
most of the outdoor maintenance tasks that are required, in return
for a fee you commit to paying at the time of purchase. However, it
still usually falls on the owner to handle any maintenance issues
that occur within the unit itself, such as appliance or plumbing
5 - Are you going to stay put?
This is a major question - how long do you expect to live there?
Buying a home requires a significant up-front investment in terms
of the fees you pay at closing. If you're not going to stay in an
area for at least five years, that's just going to be money down
You also need to stay in a home for an extended length of time
before you accumulate any equity. Because of the way compounded
interest works, you build equity very slowly during the early years
of a mortgage - you may pay down only 10 percent of the balance
during the first seven years of a 30-year loan. But after 10 years,
you can begin to build equity rapidly as interest payments take up
a progressively smaller portion of your mortgage payment.
Building equity is a major reason why people buy a home. But if
you're not going to stay put for more than a few years, you may not
build very much, particularly if home values increase only
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