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Buying your first home is both thrilling and challenging, and not for the faint of heart.
Before you even get into the housing market, you will spend quite a bit of time thinking about your goals and preparing your finances. One the most difficult decisions can be figuring out when you are ready to enter the market and to start placing offers on homes! This process looks different for everyone. Bottom line: There is not a single right time to buy a house.
Here are some tips for how you can determine the ideal time to buy your first home.
Three Major Considerations
Because this is such a major decision, you need to think about it through multiple lenses. If you let emotion take over, you will be much more likely to make a mistake. Here are the three different ways you should think about the decision to enter the housing market for the first time.
- Market Considerations
There are two ways to think about your local real estate market. First, you want to think about how the market will perform in the long-term. Secondly, you want to make decisions about the market as it exists today, especially if you are seeking a competitive advantage in a hot seller’s market. (Meaning NOW.)
The long-term view is all about maximizing the odds that your home will be a good investment. In any market, the goal is to “buy low and sell high,” but this is much easier said than done. Why? Because an equally common quip is that “you can’t time the market.”
As for the short-term market, there are many considerations that go into thinking about buying a home. You will want to research potential neighborhoods. Conduct research about neighborhood popularity, crime, commute times, school ratings, and any major developments planned in the area.
You will also want to get a sense of when the local market is most competitive. In many places, competition peaks in the spring. In a seller’s market (many areas are currently seller’s markets) this competition can make buying a home much more expensive. Getting your offer accepted may require measures like:
- Increasing the earnest money deposit
- Waiving part or all of your home inspection (meaning you will be solely responsible for repairs) (Not good.)
- Waiving the appraisal contingency (meaning that you will pay the full asking price even if the home appraises for less than that) (Again, not good.)
Buyers should think very carefully before making these potentially costly concessions!
Depending on your current living situation and the level of urgency involved in buying a new house, you may be better off waiting until later in the year and avoiding the peak buying season. That may mean you will have fewer homes to choose from, but it should also mean that there will be fewer buyers to compete with. This would decrease the chance that you have to make as many concessions in order to get your offer accepted.
2. Lifestyle Considerations
Taking time to think through your “lifestyle” can make a huge difference in ensuring that you purchase the right home and that you time the purchase appropriately. First, think about how long you want to live in your next house. Some people hope to buy a “forever home,” while others work toward their ideal home by moving “up” over multiple moves.
There are some basic pros and cons to both ways of thinking. A “forever home” is likely to be more expensive because it probably has more highly desired amenities and features. A forever home can also become a problem if you stretch your budget for it only to realize later that it was not really “forever home” material. As for making multiple moves, that can be problematic too. Each time you move is like rolling the dice with the housing market, especially if you do not put a significant amount of money down and do not build up equity. There are also transaction costs, like fees to realtors, that can make moving much more expensive.
Those are two general approaches to thinking about a home purchase. Regardless of whether you are thinking of a long-term, forever home or a shorter-term house, you still need to make sure your purchase aligns with your current lifestyle and the lifestyle you plan to have in the near future.
If you and your spouse are planning to grow your family, you will probably only want to consider homes with an adequate number of bedrooms to support a larger family. You may also prioritize school districts. Commute times are also important to consider. You get the idea. The point is that you need to make sure the purchase matches your lifestyle and goals. Doing this research will help identify if the timing is right. Maybe there are a few ideal neighborhoods that are just out of financial reach right now because they are too expensive. You may be better off saving for a year or two and then targeting those neighborhoods instead of settling for a different neighborhood now that is not as good of a lifestyle fit.
3. Financial Considerations
Wherever you purchase a home, and no matter how many beds, baths, or square feet it has, you will want to be sure that it is affordable. Not just today, not just next year, but for the long-term. This is the category where you should be most careful, because you do not want your home to become a financial burden. Consider the financial implications as part of the bigger picture. Just because your finances may not be in perfect order does not mean you cannot buy a home. You simply have to consider all of the factors and make the decision that is right for you. The main financial factors to consider are your credit, the purchase price, and your down payment.
Your credit will determine the terms of your mortgage. Having a high credit score is associated with favorable lending terms, such as low interest rates. If you can get your score above 760, you should qualify for the best mortgage rates.
Or, you may elect to move forward with a lower score and get an FHA loan. However, if your credit score is between 500 and 579, even an FHA loan will require a 10 percent down payment.
The purchase price is a major financial consideration. Your lender will be able to provide a maximum loan amount, which is essentially your maximum purchase price minus your down payment. It is probably best to buy a house with a price that is no more than four times your annual income. And remember, that is a maximum guideline—there is nothing wrong with buying a house that is priced only at twice your annual income, for example. Part of this decision will also involve taking inventory of your other debts. Having other debts means your home should be less expensive. If you are debt free, on the other hand, then you will have more buying power.
Lastly, your down payment is very important. Making a larger down payment can create more equity in your home on day one and reducing or eliminating private mortgage insurance (PMI) on a conventional loan. If you qualify for a conventional loan, paying 20 percent or more of the purchase price as a down payment will allow you to avoid PMI. Therefore, saving for a large down payment would be a great reason to postpone your home purchase. Even if you cannot put 20 percent down, you will need at least three to five percent in order to get a conventional mortgage at all (most conventional lenders will require 5 percent). FHA loans require a minimum of 3.5 percent down, and mortgage insurance remains for the life of the loan.
I know! A Lot to Think About!
Remember that the market, your lifestyle, and your finances are the three important areas to think about critically. Don’t fall for the trap of thinking about just one of these areas. Buying a house is never just about lifestyle, just about money, or just about the market. It is always about the intersection of those three things.
IF you want more help thinking through and planning this large purchase, be sure to also consider homeownership and mortgage counseling, which can help you complete the process smoothly and set yourself up for future success.
Excerpted from: Hermond Palmer, 9.21.2020
Holli Lewandowski, Certified Credit Counselor, Educator, and Advocate