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The Two Questions You Need to Answer Before Buying a Home

January 10, 2024


Min Read
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The Questions

Are you asking “am I ready to buy a home” when you actually mean “do I want to buy a home?” Or vice versa? They’re two completely different questions, but saying yes to both of them can be a clear and simple indicator it’s time to suit up (in a real estate sense, of course). So let’s walk through them.




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Question #1: Am I ready to buy a home?

Financially Ready

Do I qualify?

This’ll be an easy one. You can see what you qualify for by reaching out to a mortgage lender. If you aren’t able to qualify with one lender, it’s best to get another opinion, as some lenders have different programs.

If you want to do some quick math before talking to a lender, the most important number is your debt-to-income ratio. Simply, the amount of money you reliably make every month, divided by the minimum payments on any debt you have (think car payment, or credit card bill, not grocery bill). Things you receive billing statements for.

Trainer Jake’s Quick Tip: When you’re figuring out your DTI, always use your gross income for the calculation. Many borrowers assume it’s the amount in their paycheck after taxes, but you’ll want to use your full salary or before-tax income.

Lifestyle Ready

This is a bit subjective, so you may already know if your lifestyle is ready for owning a home. For example, if you’re planning on moving to Bali next year, owning a home for that short of time might be more hassle than it’s worth. (Unless you want to rent it out while you’re gone, of course.)

Homeownership also means taking care of the property and performing maintenance tasks. If you don’t want or aren’t able do them, you can hire these tasks out, but you’ll want to make sure you have the funds to do so. Things like a new garbage disposal and gutter cleaning can add up when paying a professional.

Question #2: Do I want to buy a home?

Big decision. Very confusing. You’ve got friends telling you to keep renting, and you actually like renting. You also have family members telling you it’s time to start building equity, and you want to do that, too. So. How can you sort through the BS and tell if you actually want to buy a home? Let’s walk through it.

Does the level of home I want fit into my budget?

If you’ve got champagne taste on a beer budget, owning a home may not be the most rewarding experience, at least at first. For example, if you’re wanting a penthouse condo but your budget says small home in the ‘burbs, your wants are quite a ways off.

Do I want to invest in my investment?

History shows us that your home’s value and your resulting equity will most likely rise naturally over time. But truly investing in your home can make that process go much further. That is, making improvements and maintaining the home on a regular basis.

Notice the one question we DIDN’T ask.

”Is it the right time to buy a home?” That question is rooted in a belief that the market should dictate what you do with your personal and financial life. The secret is, though, you don’t want to wait for something you can and want to get now.

1. You’ll miss out on equity earned in the time between now and when you end up buying.

2. Home prices rise with time.

"But what if this says I’m NOT ready or want to buy a home?"

The world isn’t perfect, and it’s all a spectrum. These questions are simply indicators.

Here are five financial questions and five personal/lifestyle questions to help you better determine if you’re ready to buy a home. Answer the following questions to get a better idea.

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5 Financial Questions

1. What is your credit score?

While debt-to-income ratio is the most important, your credit score also plays a role. An average score is around 670, and you can go lower, too. There are even programs, like HomeReady and HomePossible, which allow you to have a lower credit score, without a higher rate.

2. Is your debt-to-income ratio less than 40%?

Mortgage lenders look at how much debt you carry relative to your income to make sure that you will be able to make your monthly payments. The general rule of thumb is that lenders do not want to see your debt-to-income ratio greater than 43% (although this will increase your borrowing costs). Some programs do allow a DTI up to 56.99%, but just because you CAN qualify at that point, doesn't mean you SHOULD. With over half of your monthly income going to debt payments, you may run into issues saving and paying for regular living expenses.

3. Can you place a downpayment of 5% or more of the home price?

A downpayment of 5% will qualify you for the most common types of mortgage (assuming you have great credit). However, a downpayment of less than 20% will require you to pay private mortgage insurance, which is an additional monthly fee to protect the lending bank. This is typically .5% on top of the loan.

4. Do you have 4% or more of the house cost in cash to cover closing costs?

In addition to the cost of the home, finalizing the transaction involves a set of closing costs that can vary from 3%-7%. Most of these costs are often rolled into the mortgage, though you need to have money on hand to pay for inspections and other expenses during the closing process.

5. After all of the above costs, do you have an emergency fund for 3 or more months?

Having too much of your monthly income going to mortgage payments can hinder your ability to make unexpected, necessary home repairs or deal with other surprises. This can quickly turn your home into a burden rather than a joy. No one wants to live in a burden.

5 Personal Questions

1. Have your space needs recently changed (Marriage, babies, empty nest, etc)?

Major life changes are always a good time to reassess your housing situation since your financial situation or space needs may have changed. Avoid buying a house because your friends are doing it or you think it’s “just time.” This can lock you into a long-term investment that might not be suitable for your future.

2. Have you decided on specific neighborhoods where you want to live?

If not, make sure to prioritize this by visiting various neighborhoods and talking with locals or an expert agent. You will live in this house for a long time, so you want to be certain that you like the area.

3. Have you decided what you need in your home and what you would like in your home?

Make sure that you and anybody else that will live in the home have aligned on what is most important in the home and what level of improvements or maintenance you are willing to do. This will make sure you only look at homes that are a great fit.

4. Are you stable in your career and confident your income will stay the same (or grow) over the coming years?

A mortgage is a long-term financial commitment. If you are not certain you will remain in the area or that your income will be consistent, you could end up struggling to make payments or need to sell quickly into a non-ideal market. It is also more challenging to get approved for a mortgage if you have career instability in the past few years.

5. Do you plan on living in this home for more than 5 years?

Your early mortgage payments primarily pay back the bank. They do not greatly increase your equity (ownership) of the home. If you only plan on living in the home for a year or two, you will not build significant equity in the home but you will be on the hook for costly maintenance and other costs. If you plan to be in a home short term, you are betting that the market will go up enough during that time to offset maintenance costs, selling costs, and return enough profit to be worth your while.

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