If you’re going to make your American dream come true, you probably wonder what to look for when buying a house. Home purchasing is always a responsible financial decision, so you should assess all the risks and benefits and be fully prepared for what can await you down the road.
There can be many pitfalls that you should be aware of before, while, and after purchasing a home. Together with Michael Lefler, the senior editor of 1F Cash Advance, we’ve made our top 5 (and a few more) of what to consider when buying a house.
What to know Before Buying a House?
House hunting is a process that should be approached cautiously and responsibly. Before you start your homeownership journey, it’s important to consider a few factors that can affect your overall experience.
Check Your Debt-to-Income Ratio
A debt-to-income (DTI) ratio shows how all your current debt payments correspond to your monthly income. This indicator is quite important when it comes to financing. Whether you’re going to take out a mortgage, a personal loan, or a home equity loan, a lender will look at the financial burden you already carry. This is made to evaluate how much debt you can still afford without sacrificing your major living expenses and needs.
A DTI of 43% is usually considered reasonable. This ratio is typically used by the Federal Housing Administration. However, the lower the value, the better. Let’s take a look at how DTI is calculated. Suppose that your monthly gross income is $5,000. A 43%-DTI will be $2,150. This is the amount of debt you can carry on a monthly basis and still be eligible for a mortgage.
Analyze the Housing Market
The real estate market often changes under certain economic conditions. Also, home prices can go up in some markets and decline in others. By analyzing the state of the real estate market in your chosen location, you can find out whether buying a house makes sense right now from a financial perspective.
One of the strongest arguments for buying a house is when purchasing turns out to be cheaper than renting in terms of your monthly payments. Additionally, it can be a good idea to make such a long-term and expensive investment if the market is in a recession. Such price declines often happen due to seasonal cycles.
“The best time to buy a house is typically late fall to early winter,” – says Michael Lefler. This period comes with the lowest premiums above market value, allowing home buyers to find the best deals.
Know Mortgage Lender Expectations
Lenders don’t like when borrowers are living on the edge. Thus, you can seem like an unreliable home buyer if your DTI is on the verge. Lenders can expect you to face difficulties in covering both your monthly mortgage payment and utmost necessities if your financial situation suddenly changes for the worse, for example, due to rising living costs. Thus, mortgage lenders usually expect your DTI to be less than 43% even after your mortgage payment is added to your payment history.
Your credit score is another important consideration. Each conventional loan provider typically checks your credit report via three major credit bureaus. While FHA loans may be available to borrowers with credit scores of 500 and higher, mortgages that are not backed by the government usually come with a higher minimum credit score requirement. In most cases, you will be expected to have at least a 620 credit score to qualify.
Whether You Have Enough Money for a Down Payment
Most mortgage lenders require you to provide a down payment of at least 20% of your house’s price. Loans offered by the Federal Housing Administration (FHA) usually come with a lower down payment, which is 3.5% of the cost of your home. However, if you have a credit score of 500, you will be asked to pay at least 10% upfront.
Thus, you can’t just wake up one day and decide you want to buy a house. Before you start this journey, you need to have some money saved. As the amount of your down payment depends on how much the home costs, you need to decide in advance on your house’s price ceiling.
The higher your down payment, the less your monthly payment on a mortgage will be. Additionally, you will have more lenders to choose from. This will allow you to shop around and get the best possible terms and rates.
How Much House You Can Afford
Review your income and savings to understand how much house you can afford right now. In addition to the money for the down payment and all associated costs, it’s recommended to build a nest egg you can turn to in case of emergencies. Keep in mind that you can face several risks if something goes wrong in your financial life. If you default on your mortgage, a lender can foreclose your house and sell it to cover your unpaid debt. Therefore, try to be realistic about your current financial opportunities.
Factors to Consider When Buying a House
Well done! Now you know what you need to consider before buying a house. While you’re busy choosing the right home and the way to finance it, there are a few important details you need to pay attention to.
Your home’s location is one of the most important factors to consider. This is because it impacts your day-to-day life and determines the environment you will live in. Additionally, a good location makes it easier for you to sell the house at a good price. Here’s the list of factors you need to carefully consider:
- Flood zone code. Take care to find out the exact flood zone code of the home’s location and specify the level of risks it corresponds with. If the risk is high, purchase flood insurance. Also, always evaluate the potential damages you would have to cover in the event of a flood or storm;
- School district. If you have a child, take a look at the local school district and assess the schools within the potential neighborhood;
- Crime rates. Make sure the neighborhood you choose is safe to live in. Do your research, check out the information in media, or join some neighborhood groups on social media to get more information about what’s going on in the area;
- Public transportation. If you don’t have a car, choose a home that is close to a bus stop or a subway station, depending on what method of public transportation suits you most to get to work.
Carefully consider your home size and floor plan to make sure it meets the basic needs of your family. Besides square footage, pay attention to other factors, such as the number of bedrooms and bathrooms, living room size, yard and garage space, and the home’s overall layout. Determine all the factors that are really important for you, and don’t settle for compromises. Your house is an expensive investment, so you and your family members need to feel comfortable there.
House price is often the biggest factor home buyers consider. Choosing a house that you can’t afford can lead to spending most of your monthly earnings toward covering your mortgage payments. Also, it increases the risk of late and missed payments. Besides ruining your credit score, it can also put your property at risk. Unlike conventional loans, mortgages are always backed by your house. This means that a lender can foreclose it if you default.
Think about all the amenities and add-ons you may want to have in your house or near it, and review your potential home on their availability. You may want to have a house with a pool or a playground or at least to have one nearby. It’s especially true for some expensive features that will be hard for you to add after purchasing a house. If you drive a car, it may be important for you to have a garage.
Mortgage Interest Rates and Other Costs
If you’re going to finance your home purchase with a mortgage, it’s important to pay attention to a few more factors. The cost of your mortgage loan is typically one of the most important features as it determines how much you will overpay over the loan life.
The cost of your loan consists of an interest rate and extra fees. Mortgage rates can range from 6% to nearly 9%. The exact figure typically depends on the type of mortgage, the repayment period, the down payment amount, and your credit score.
Besides an interest rate, there can be other homebuying-related costs. They include property taxes, homeowners association fees, homeowners’ insurance, and closing costs. All these can potentially affect your final home cost.
Monthly Mortgage Payments
Your monthly mortgage payment should correspond well with your current monthly budget. In a perfect world, it should not exceed your rent payment. However, this is not always possible. If it is still higher than the rent, make sure you can afford to pay it along with other regular expenses and financial obligations you carry on a monthly basis.
Important Home Features to Pay Attention to When Buying a House
There are several specific house features that also play an important role. Pay attention to the following parameters when buying a house.
If there’s something wrong with your roof, it can lead to further serious damages that will be not so easy to fix. Additionally, it can also be expensive, which will result in extra expenses that will be your responsibility after you close the deal. Watch out for problems such as missing or damaged shingles, leaks, or other indications of roof deterioration.
Before you buy a house, it’s a good idea to be aware of the state of the windows. This is because they have a big impact on the overall comfort and energy efficiency of the building. Some problems, such as sticking when opening or shutting, are easily fixed and just require modest adjustments. In the meantime, leaks and draftiness during a downpour may be signs of serious issues that you should stay away from.
Additionally, you should confirm that the plumbing system in your new house is in tip-top shape. When determining if a home would be a perfect fit for you, you should be aware of two things: leaky or broken pipes.
You and your real estate agent might be able to utilize this knowledge to negotiate a better deal. For example, if you find some plumbing issues, ask a seller for a sales price reduction. Another option is to ask the seller to make repairs. You can include this as a condition of the transaction in the contract.
Red Flags to Look at for Home Buyers
Keep an eye out for the following red flags when viewing properties:
- Foundation problems. Foundation problems are among the most costly issues to correct. It can cost you thousands of dollars to fix it. Otherwise, your home will simply be life-threatening and come with the risk of shifting or sinking. To identify foundation problems, simply look at the door frames throughout the home. If there are any problems, the doors may be difficult to close or may not seem square. Also, you can easily check the foundation for cracks if the house has an unfinished basement.
- Pest or insect problems. Pests can cause home damage, especially wood-destroying pests. Make sure there are no termites, powder post beetles, and carpenter ants in your potential house prior to closing.
- Mold. During the home inspection, take a look at any signs of mold in the house. Mold can be the reason for various health issues, especially when it comes to young children. Even though mold issues are not usually obvious, you should still assess if a house you are considering is a good fit for you if it has one. Of course, you can subject the house to mold remediation, but its cost may be high. A home inspector can help you identify mold issues in a house, just like they can with any other warning signs;
- Fresh paint. If the entire room is repainted, there is most likely nothing wrong with it. This is the common advice that all real estate agents give to sellers before they list their homes for sale. However, random spots of fresh paint on the wall should be alarming. This may be an indicator of serious problems, such as mold or leaks, that a seller tries to hide;
- DIY plumbing or electrical work. Be sure to ask the seller who performed the plumbing and electronic work in their house. This is especially important if you are purchasing a flipped property. Flippers are fond of amateur workmanship without having the qualifications to complete the projects properly. Remember that such DIY work can lead to serious consequences that will cost you a lot of money;
- Odors. Both foul and pleasant odors can be a red flag. If everything is very clear with an unpleasant odor, strong scents are often an attempt to disguise it. If there are a lot of candles, diffusers, and air fresheners in the house, or windows are opened in the middle, be careful.
What Does a Home Buying Process Look Like?
Home buying process can seem difficult, especially if you’re a first-time buyer. But forewarned means forearmed. Our instructions will help you prepare for this significant step and make the process less stressful.
- Finding the right home. The easiest way to do this is to turn to a real estate agent. You can also search for listings online or drive around the neighborhood you like while looking for homes for sale.
- Secure financing. Once you already have a certain house in mind, it’s time to decide on the way to finance it. Mortgage is the most popular option you can turn to. Shop around and choose the lender with the best terms. Pay attention to an interest rate, fees, and other associated costs.
- Pre-qualify. Most mortgage lenders allow borrowers to pre-qualify for a loan without affecting their credit scores. If you’re likely to get a loan, a lender will provide a mortgage pre approval letter and specify your potential loan terms.
- Make an offer. Your real estate agent will help you assess the house properly. Also, don‘t forget about the closing costs, which can be between 2% and 5% of your house’s price. Look at your budget and make sure you can afford it.
- Carry out a home inspection. Even if it seems like the house is in tip-top shape, you still need to inspect it carefully to make sure there are no potential problems you’ll face down the road. If there are some serious defects that were not disclosed, ask a seller to fix them.
- Close the deal. Closing is always about signing a ton of documents. You should also complete your mortgage application and may face home appraisal, origination fees, title insurance, and taxes. Although this process can be quite overwhelming, in the end, you will be rewarded with the keys to your new home and the title deeds.
The Bottom Line
If you’re going to buy a house, there are multiple things you should pay attention to. Purchasing a home is probably the most expensive investment in the entire lifetime, so you should approach it responsibly. Pay attention to all aspects that are important to you, take into account your budget, and be patient. We hope our guide helped you get a little closer to your dream and clarify where to start and what to consider when buying a house.
What Are the Most Important Factors When Buying a House?
The most important factors when buying a house include its price, size, location, and amenities. Additionally, you need to consider how you will finance the purchase. If you’re going to take out a mortgage, pay attention to your credit score, debt-to-income ratio, potential interest rates, and monthly payments.
When Is The Best Time to Buy a House?
Experts recommend buying a house from autumn to winter. This period is marked by a price decrease in the real estate market, so home buyers can find the best deals at a reasonable cost.
What Credit Score Do I Need to Get a Mortgage?
Most mortgage lenders have minimum credit score requirements of 620. However, FHA loans can be available with a credit score of 580 or even 500, provided that you can make a down payment of at least 10%.