Should You Buy a House?
5 Things to Consider Before Buying Your First House
It is no secret that buying a house is one of the largest financial decisions you will make in your lifetime. Housing is typically one of the greatest expenses on anyone’s budget so the decision of buying a house should not be taken lightly.
As a young professional, I’m sure you are feeling the pressure to go and buy your first home. It is almost like a right of passage into adulthood. Not only that, but many people have inherited the misunderstood belief that renting is simply “throwing your money away.” While there are lots of benefits and blessings to homeownership, it takes a financially wise person to understand when to stick with renting.
I have been a real estate agent for over 6 years now and have been a money coach for the past 2 years so I often get asked questions about when someone should buy their first house. So in this article, I’ll share 5 things you should consider before buying your first house. That way, you’ll have a better understanding of whether you should buy a house or not.
Please post any questions you have in the comments!
Is the price-to-rent ratio in your area below 15?
One of the first things to consider when determining whether to buy a house is the price-to-rent ratio. This is the median existing home price in the area divided by the average annual rent that would be paid for a comparable home in that same area. The higher the ratio the more expensive it is to buy and own a home compared to renting comparable properties.
Generally, anything above 15 is considered high, and therefore it may be more attractive to rent. The price-to-rent ratio for any area can easily be found with a quick search online.
Will your mortgage payments be less than 30% of your take home pay?
Do not put yourself into a position where you are overextended. If the majority of your income goes towards paying your housing needs you will leave very little room for margin. This is especially critical in the wake of a financial turnaround. When inflation rises many of your everyday expenses will start to become pricier. This makes it more difficult to stick to your budget.
Not only that but if the market crashes, jobs tend to be on the line. Being overextended and then losing your job could lead to utter financial ruin that could take years to recover from.
Many financial experts recommend your housing expenses be no more than 30% of your take home pay – aka the actual money you deposit into your bank account. The more margin you can create the better.
You can get some estimates of what you could expect to pay for your mortgage by searching up some real estate affordability calculators online or by speaking with a lender in your area.
Do you have at least 20% for a down payment?
While it is possible to buy a house with less than 20% down, if your mortgage is more than 80% of your home’s value you will have to pay what is called Private Mortgage Insurance (PMI).
PMI is an additional monthly fee that lenders charge on top of your monthly mortgage because you are considered a “high-risk borrower”. It is like an insurance policy for them. PMI is put into place to protect the lender (them) not the borrower (you).
PMI can cost you between .3% and 1.5% of your original loan balance every year. And you typically pay PMI until you have paid down 20% of your home’s value. Now, here’s the tricky part… YOU typically have to be the one to call your lender to request your PMI to be removed once you’ve paid down 20% of the home’s value. Plenty of lenders will not do this on their own.
PMI does not go towards paying your interest or principle. It simply goes straight into the lender’s pockets. So if you choose to buy a house before you save up the 20%, just know that you will have this extra monthly cost added to your mortgage. But I highly recommend saving up to buy your first house with a full 20% down payment.
Do you have an emergency fund saved?
Not only is buying a house expensive but to be a homeowner is also expensive!
Your emergency fund needs to grow if you are going to become a homeowner because emergencies are no longer just health or car-related anymore. If a toilet breaks down, or your furnace needs to be replaced this is now on your shoulders, not your landlord’s or property manager’s.
Not to mention all of the general maintenance and upkeep like sewer line clean outs and new roofs. Preventative home maintenance will be very important when you become a homeowner in order to keep large maintenance costs as low as possible.
You will also be responsible for property taxes, potential HOA dues, and insurance. Therefore, general savings should also be increased.
Do you plan on living there for at least five years?
Whether you are extremely familiar with the home buying process or not, you have probably heard about many of the upfront costs of buying a house. Many are familiar with the term down payment, which is the cash contribution that the buyer is paying towards the purchase price.
In most purchases, the upfront costs can be rather enormous. Even if you have saved up enough to purchase a house, any possible financial gain from owning a home can be destroyed in an early move. The purchase of a home comes with several upfront expenses. Overcoming these costs takes time. Additionally, most of your mortgage payments are going towards interest in the early years instead of building any equity.
Another thing to consider are the expenses that you will experience when selling your house. Traditionally, in most markets, the seller pays the commission for both their agent as well as the buyer’s agent. So even if you sell your house for $400,000, the commissions can add up to be close to 6% which would be $24,000. That alone can eat up most of the perceived earnings.
Needless to say, there is not much gained in the first few years. Any financial benefits of homeownership come with time. The general rule of thumb is to stay in a house for 5 years – but this can differ depending on the real estate market in your area.
If you think you may be moving within five years, stick to renting. It is much easier to break a lease than it is to sell a house.
Did you answer each of these 5 questions with a yes?? Then you are on the right track to buying a house!
Obviously, it isn’t as simple as just checking off the boxes. There are plenty of outside factors that go into buying a house as well. Homeownership comes with a lot of added responsibility, but also tons of blessings.
If you still have questions about the home buying process, whether you are financially ready, or want to know where to get started in buying your first house, I’d love to jump on a call with you to chat more about your situation. You can book a free call with me here!
It’s Not Always a Simple Decision
Deciding whether or not to buy a house isn’t always as easy as checking off the boxes. There are plenty of emotional factors that can affect living situation decisions. My husband and I personally have been renting for the past 4 years. While we do have a couple of rental properties, we still rent the house that we live in. Check out this video to hear why.
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