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If you're looking for a house right now, this very well could be one of the most difficult times to buy real estate. The amount of available homes is super low and prices have skyrocketed. I know where we live in Metro Detroit, it seems more difficult than ever to buy a home at a decent price. From what I’ve read and heard, it sounds like a similar story in other major metros in the US as well.
If you're going to take the plunge this year and buy a home in this tough market, realize that this commitment may very well be the largest purchase you'll ever make. You want to make sure that you're not setting yourself up to become house rich and cash poor (or life poor for that matter). Having a nice home in a beautiful neighborhood can make you feel incredible, but it can also put a 100-pound weight on your back if the money is tight.
Here are some suggestions that my wife and I adhered to when we bought our home in 2013. It helped us to find our forever homeand not feel strapped for cash each month.
1. Have an Emergency Fund
Before buying a house, I recommend setting up an emergency fund. This is a separate savings account outside of your checking account that you use for the unexpected occurrences of life. Even with a stellar inspection, this new home is bound to need upkeep that you weren't planning for.
In the first year of owning our “fully updated home”, we had to replace our roof, repair our AC unit and replace a cracked bathroom sink due to our 3-year old dropping a heavy glass inside of it. Life happens! These “whoops moments” weren't that big of a deal for us because we hada decent emergency savings in place.
I'd recommend 3 months of living expenses set asidein the savings account. This could cover a big mishap, multiple little issues or even three months of job loss. If you don't have an emergency fund yet, start factoring it into your monthly budget today.
Related Article: Create Your Budget on Mint in 10 Simple Steps
2. Avoid Private Mortgage Insurance (PMI)
Alarger down payment on your home might seem like a lot of money now, but the investment is totally worth it in the long run.If you put down atleast 20% on your home, you will avoid Private Mortgage Insurance (PMI) with most mortgage lenders. PMI is an insurance for the mortgage company that YOUpay for on THEIRbehalf. It is insuring them in case you default on your mortgage. Remember 2009?
Since PMI can add another 1% to your mortgage, it should be avoided at all costs. For example, if you're getting a $100,000 mortgage, you'd be paying an additional $1,000 per year or $83.33 per month of unnecessary costs. Go for at least 20% down and you're golden.
3. Keep Your MortgagePayments to Less Than 25% of Your Income
Having manageablemonthly payments is crucialwhen buying a new home. Whichevertype of mortgage you choose(here's my case for a 15-year fixed), calculate how much of a down payment you'll need to keep your payments to less than25% of your monthly income. At this percentage, you'llstill be able to pay your bills, save for retirement, go on family trips and, overall, just enjoy life.
If your mortgage takes up 50% of your income, there's not much money left over for all of life's other important expenses. You'll have an awesome house, but you might not be able to have anyone over to enjoy it because you can't afford to entertain or furnish the place.
Getting a low rate also helps a ton as well! We went with LendingTree and were able to compare rates from a group of lenders. When you're talking about the largest payment of your life, you want to make sure you're reviewing your options.
4. Consider the Cost to Update and Furnish Your New Home
Make sure to budget the amount of money you'll need to buy furniture, update paint colors and decorate. This can add up fast depending on your taste, style and overall family situation. For example, are you moving from a 900 square foot apartment to a 2,000 square foot home? Your budget couldbe quite higher than someone who is downsizing. Factor in how many beds, couches, tables and chairs you might need. There's a whole lot of wall space in a bigger home. Consider the pictures, art and mirrors too.
You don't need to go crazy here. It's not required that you buy all new stuff. Craigslist and Facebook Marketplace have some excellent gently used items to make your new house feel like a home.
Note to Self: Always allow for decorating money or marriage will suffer. Happy wife, happy life.
Related Article: 15 Year Mortgage Paid Off in 5 Years
5. Have Patience and BuyWhen the Time is Right
Since this could be the largest purchase you'll ever make, take your time and don't rush. It's easy for me to say! I know! All I'm saying is go with your gut. If the pricedoesn't feel right or you're not excited about the home, then don't force yourself to buy something you may regret later.
Appraisal
To curb some of the anxiety, be sure to always get an appraisal. Prices are crazy high right now and sellers are taking advantage of it. Make sure you get an independent expert that confirms the pricing is in line with the neighborhood.
Inspection
Also, be sure to get an inspection before committing to your final purchase. A smart licensed real estate agent will help guide you through important strategies like this. Do your research andinterview a few agents to make sure they are the right partnerfor you. This big purchase requires the best partners.
Overbuilt Homes
That agent should also help you to not make ill-advised purchases like buying a home that is overbuilt for the neighborhood. You know what I'm talking about …the home that looks like a3-story castleamongst a sea of 1-story ranches. Stay away!
And you may not want to hear it, but renting is not the end of the world. Depending on your financial situation and the available homes in your desired neighborhood, renting a home until you have enough cash saved up could be your best option.
Happy hunting everyone!! I hope you land your dream home and it's everythingyou've always wanted. There's no place like home.
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Carpe Diem Quote
““If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.”
— Steve Jobs
Who's looking for a home right now in this crazy market?
Please let me know in the comments below.
