If you're thinking about purchasing your first home, remember—it's a big decision and several things should be taken into consideration. Here are the top 5 questions you should ask yourself.
1. How long do you plan on living in the home?
The national average for how long people live in their homes is approximately seven to nine years. Reasons for leaving a home can vary widely, but if you purchase a home and decide to move after only a short time, you may end up paying money in order to sell it. Generally, the shorter you're in your home, the less time your home has to appreciate in value—perhaps not enough to recover what it cost to buy and sell the home.
The amount of time it takes to recover those costs can depend on various economic factors. In most parts of the country, homes appreciate at an average of five percent per year. If this is the case in the area you are looking to buy a home in, you should stay in your home at least three to four years to recover buying and selling costs. If the area where you buy your home experiences an economic upturn, it may take less time to recover those costs. Conversely, if the local economy is not doing well, it may take longer.
The amount of time you plan on living in your home will have an impact on what home loan you choose. If you plan on staying there for more than ten years, a long-term fixed-rate mortgage might be a sensible choice. But if you know you're going to move within three to five years, an adjustable rate mortgage (ARM), with its lower payment options, might be a better choice.
2. Can the home meet your future needs?
It's important to find a home and a home loan that satisfy your needs in the present, as well as in the future. Do you plan to have kids in the next few years? Do you plan on starting a business out of your home? Be sure that the home has what you'll need now, and in the years to come, so that you don't outgrow the home and have to leave it prematurely.
3. What does your financial picture look like?
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It's possible to find a lender for almost any financial situation. However, if your past financial history is good, you will have better home loan options to choose from. Generally, a couple of late payments on a credit report won't affect you that much and you will be considered a good credit risk, qualifying for lower interest rates . If you have more issues on your credit report, lenders like Quicken Loans may still provide you with a home loan, but because you're more of a risk to the lender, you may have to pay a higher interest rate and fees.
Some people believe you should refrain from borrowing as much as you qualify for so as not to stretch your financial boundaries. Others feel you should stretch to buy as much home as you can afford because with expected increases in your earning potential, a big payment today will seem like less of a payment in the future. Only you can make this decision.
A popular guideline is to follow the "28/36" rule. This rule says that your monthly housing costs shouldn't exceed 28 percent of your monthly income, and your total debt payments shouldn't exceed 36 percent of your total monthly income. If your payments do not follow the 28/36 rule, don't worry. Lenders offer mortgages customized to each borrower's individual situation. Depending on your assets, credit history , job potential and other factors, lenders can work with ratios 40-60% or higher.
While we are not advocating that you should purchase a home utilizing the higher ratios, it's important for you to know there are other options available.
4. Where will the money come from?
Typically, home buyers will need money for the down payment and closing costs in order to close the loan. However, you don't always have to have a lot of money for a down payment, as long as you're a good financial risk to a lender. Several loan options today offer zero down and low down payment home loans. Even if your credit isn't stellar but you have managed to save 10-20% for a down payment, you will still have some very good mortgage options.
5. Have you considered the ongoing costs of home ownership?
Maintenance, improvements, taxes and insurance all add to the costs of owning a home. And if you buy a condominium or a town home, some communities require a monthly homeowner's association fee.
If you're concerned about these types of additional costs, you should look for home loan options that minimize fees and lower your mortgage payment relative to other home loan options. Be sure to make your realtor and your lender aware of your concerns.
If you'd like to know more about the home buying process, call us at 800-251-9080 to talk to a home loan expert.
http://www.quickenloans.com/mortgage/articles/buying_home/buying_first_home.html
