The first step in home buying is making an honest evaluation of your current situation. This review should include several factors. Of course, you may be emotionally charged about some of your reasons. I would caution you to sit back and put everything on a pad of paper.
Right now, you might not even be aware of the things you need to consider. It is quite possible, you have read an article or had a conversation with someone and now you think it is time to buy. Let’s take a look at some of the arguments for and against buying now. Using this information will get you started in a focused manner. Understand, you are an individual and there is no cookie cutter answer. Let’s see if I can’t separate the proverbial chaff from the grain. Hopefully, I can separate fact from fiction with the following.
- “It is cheaper to buy than it is to rent.” This statement is usually shared by a real estate agent or a mortgage broker. As an aside, in the future when evaluating a statement, take a long look at who stands to benefit financially from the statement. Now, if you are paying $1,500 a month in rent and you are told that your mortgage payment will only be $1,400 per month, buying still may not be cheaper. The terms of your loan are very important. You see, if your situation changes and you can’t pay the $1,500 in rent, you will have to move. If you break your lease, you will have to pay at least a two month penalty ($3,000). Your landlord may agree to accept the money or make a payment plan with you. Your credit may or may not be impacted. If your situation changes and you can not afford the $1,400 per month mortgage, you will have to move. It doesn’t matter if you use a short sale or turn the keys in or if the lender forecloses, your credit will be impacted. Remember, most leases are for one year, most mortgages are for 30 years.
- “Buying a home is a good investment”. Hmmm, this statement is usually shared by the same group that shared the first statement. The most recent melt down of the real estate market should give you a clue to the validity of this argument. Yes, over the long term ( 20 years or so ) the value of a home has historically increased. Depending on who is sharing the statistics, you home could double or triple in value over time. I am not a financial advisor, but I did spend the night at a Holiday Inn and I promise you that no one can guarantee the future value of any home. I do know that just about everyone that bought this line in recent memory owns a home that is worth less than they currently owe. From where I sit, that is not a good investment.
- “Owning a home is the American Dream”. Well, this makes it a perfect tri-fecta. It is another statement shared by the folks that brought you the first two statements. It is my humble opinion that the American Dream is much more that owning a piece of land. Part of the American Dream includes the freedom to choose whether we rent or we buy or if we just want to push a shopping cart and sleep on a heating grate. Just because “Madison Avenue” attempts to guide your vision, you don’t have to buy into the hype.
What should you evaluate before beginning the process? I would encourage you to ask yourself the basic questions that have withstood the test of time.
- Why do you have to move and why do you want to buy? Your reason for moving does not have to be the same as your reason for wanting to buy. They are separate issues. Wanting to buy must be tempered by your ability to buy. Your ability to buy can best be evaluated by a loan officer. It is a simple process. You tell them about your financial situation and they tell you how much money you can afford to borrow. Of course, you probably should limit your loan amount to what you are comfortable paying and you should have the evaluation done on a fixed rate loan. Using one of the fancy adjustable rates on your first home is usually a prescription for disaster.
- When do you want to buy? Unless you have other reasons, you should avoid buying when the market favors sellers. Agents will have me for this, but I believe that October through February is when buyers have the most leverage. (If you can time your purchase around the time between Thanksgiving and Christmas, you may be in a really strong position.)
The first step in home buying is making an honest evaluation of your situation. Write down the pro’s and con’s. Then sit down with a lender and get a clear picture of your financial situation. Listen to their advice. Then get it all in writing in a good faith estimate and a work sheet. Get both. Then, if everything is a go, move to step two…make a careful examination of your needs. I will cover my thoughts on step two in my next article.
As always, if you have any questions regarding the first step in home buying, feel free to contact me.