before you buy

Should You Look for Your First House Or Keep Renting?

Posted by jaclynnelson

Your First House Or Keep Renting?

Packed moving boxes in a homeImage: Kettyah Chhak

5 key questions to ask yourself before buying a home.

KEY TAKEAWAYS

Tired of working so hard just to build your landlord’s equity instead of your own? Been dreaming about paint swatches and obsessing over Pinterest projects? Making that leap from renting to owning a home comes with many perks — both financial and emotional. And even though home ownership comes with great responsibility, you might be surprised how achievable it can be.

Certainly, the best time to trade security deposits for a down payment is different for everyone. If you’re thinking about switching from renting to owning, ask yourself these five questions to decide if you’re ready to embark on the home ownership adventure.

1. Are You Financially Prepared?

Let’s not beat around the bush: Buying a home requires a substantial financial commitment.

There’s the down payment, of course. “On average, you want to have a minimum of 5% to 7% of the cost of the home you’re targeting,” says Jason Harriman, a REALTOR® with San Antonio-based Heyl Real Estate Group at Keller Williams Realty. Then, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

Tip: Keep in mind if you put down less than 20%, you’ll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it’s about $50 to $200 a month. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 — but the most competitive interest rates will be offered to those with a score of 700 or above. So if you haven’t started practicing those good credit habits yet, it’s time to start developing them.

Related: Myths About Credit Scores

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you’re paying out to other lenders. Ideally, a borrower’s debt-to-income ratio — how much you pay toward debt each month divided by your gross monthly income — should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesn’t exceed 43%.) If yours doesn’t, think about how you can get that debt needle moving in the right direction.

“The best way to do this is to pay off any unsecured debts like credit cards and personal loans, and keep them as close to a zero balance as you can,” says Harriman.

What Nest is Next?

To rent or buy? What to consider. More like this.

 

2. Are You Prepared to Make Compromises?

Kathleen Celmins, who manages the personal finance site “Stacking Benjamins,” was financially prepared to manage a mortgage. But once the house hunting began, she quickly realized she was priced out of the homes she had envisioned for herself.

“I originally wanted a single-family home with a yard and in a great neighborhood,” she says. But given her price point, the homes she could afford ended up being in, well, not the greatest neighborhoods. “At one point, we looked at a property that was directly behind a strip club,” she laughs. “We didn’t even go inside.”

After several weeks of searching, Celmins realized she needed to find a middle ground. “In my price range, I could get a not-so-great house in a not-so-great neighborhood. Or, I could get a really cute condominium with a gas range and granite countertops,” she says. “It was something I compromised on. I gave up a yard for having fancy stuff in my condo.”

3. Are You Emotionally Ready?

When it comes to renting, surprises don’t require much emotional investment. The rent goes up? You can move. The fridge is on the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, it’s time to start reading Yelp reviews. And if property taxes unexpectedly rise, it’s on you to appeal or pay up.

“My homeowners association fee doubled in the first year I owned my condominium,” says Celmins. “Then my real estate taxes were reassessed. My mortgage payment went up and I panicked. I didn’t even know that could happen.”

Of course, having the financial flexibility to cover those unexpected things is important, but don’t overlook the importance of having the mental and emotional capability of dealing with them responsibly when they arise. Everything could be peachy for months, and then three maintenance issues might spring up in the same week. Stress management and problem solving skills are home ownership biggies.

4. Will Owning Pay Off in the Long Run?

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you don’t, there’s still the financial advantage of building equity in your home, instead of lining your landlord’s pockets.

5. Has Your Lifestyle Outgrown Renting?

Many people find a rental can only take them so far. When you’re ready to start a family, you’re going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for Junior to play or for a dog to scamper around. And speaking of Fido, the vast majority of renters have trouble finding a place that will allow for their pet. Home ownership can end that stress for good.

Then there are the renovations. If you’re itching to test out your DIY skills and personalize your space, you’re probably ready to own. Landlords who allow property renovations — especially DIY projects — are few and far between.

Buying a first home is a big change — both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make. “Turns out it’s awesome,” said Celmins. “I love it so much.”

Related:

Buy & Sell, Buy, First-Time Home Buyer

is a freelance writer who writes about money, home, and investing. Her work has appeared on Forbes.com, the Huffington Post, and Time.com. When she’s not writing, she’s working with her husband to slowly renovate what seems like every square inch of their home.

 

Before Buying, REALTORS Insist You do These 4 Things

Posted by jaclynnelson

Before Buying, Real Estate Pros Insist on Doing These 4 Things

What you really need to know about buying — from the people who house hunt for a living.

 

One house you’re looking at has the wraparound porch you’ve fantasized about, but it’s on a high-traffic street. The condo you like has a doorman in the lobby (you can order online now!), but it has no dedicated parking. What to choose?

It’s not every day that you buy a home and make decisions about the next three, five, or 10 years of your life. Since you can’t exactly take a home on a test drive, how do you decide? That got us to thinking about real estate pros. When they’ve seen practically everything on the market, how do they choose?

Four pros who’ve seen it all share their advice and their stories of hunting for just the right home.

Compromise for Your Priorities

Veteran real estate agent Nancy Farkas knew exactly what she wanted in her home: ranch style, three bedrooms, high ceilings. But you know what she bought? A two-story Colonial.

Huh?

For Farkas, an associate partner with Coldwell Banker Heritage REALTORS®, in Dayton, Ohio, the home’s location and price trumped style. “I had a dog I had to go home and walk at noon, and the house was close [to work] and the right price,” she says.

Her advice: Make sure your practical and functional priorities don’t get lost in all the home buying hoo-ha (sparkling granite counters, new hardwood floors, a steam shower!). Remember, you can always add the hoo-ha, but you can’t make a home fit all priorities, such as location and price.

Dig Into the Details (Dull, Yes, But Worth It!)

When Grigory Pekarsky, co-owner and managing broker with Vesta Preferred Real Estate in Chicago, was looking for his first home, one of his priorities was to minimize his maintenance costs. He made sure to find out if the house had a newer roof, good siding, and a newer furnace. But he recommends you go even deeper to uncover a home’s not-so-obvious maintenance costs:

  • Scope out the sewer line — especially if you’re interested in an older home — to make sure there aren’t any tree branches or other debris clogging up the works. Otherwise, you might find some nasty sludge in the basement.
  • Look at the trees. How mature are they? Roots from older trees can invade the sewer line; untrimmed branches can pummel your gutters during storms.
  • Know what’s not covered by homeowners insurance. “I learned seepage isn’t covered. Shame on me,” he says.
  • Ask how old the appliances are. You might need to budget for something new in a few years. Sellers are only required to fix what the inspector finds is broken; they’re not going to upgrade working appliances for you.
Grigory Pekarsky opening his refrigeratorImage: Jacob Hand for HouseLogic

Seek a House That Matches Your Lifestyle

Having lived the high-rise apartment life as a renter, Pekarsky knew a single-family home was just what he wanted. He was tired of living in a relatively small space with no yard. He wanted a house he could “grow into in the next three to five years.” That meant multiple bedrooms and bathrooms for the family he plans on having. So what he bought — a three-story, single-family with a finished attic bedroom (shown below) on Chicago’s North Side — suits his lifestyle perfectly.

Grigory Pekarsky in his bedroom with his dogImage: Jacob Hand for HouseLogic

In addition, “you get the biggest value from owning the land,” he says. “In a single-family [home], people aren’t telling you what to do with the investment.”

On the other hand, Matt Difanis wished he’d bought a condo when he bought his first home, a small bungalow ranch in a charming, historic neighborhood in Champaign, Ill. It was first-home love — until it rained.

“If I didn’t clean out the gutters before every rainstorm, the basement would leak,” says the broker-owner of RE/MAX Realty Associates in Champaign. He didn’t realize that taking care of a single-family home wouldn’t be his cup of tea. “I should have opted for a condo without gutters to clean and a lawn to mow,” he says.

Agent Amy Smythe Harris of Urban Provision REALTORS®, in Woodland, Texas, bought a home with a sizable downstairs suite her parents could use now (and she could use years from now). She says her millennial clients aren’t forward-thinking about their lifestyles. Some are childless and say they don’t care about schools, pools, and tennis courts. Then they become parents a few years later and have to move.

“Once they have kids, the first question [they] ask is about school districts, and the second is about where the parks and pools are,” she says.

The pros’ bottom-line advice: Think of your lifestyle preferences and how those might change in the next few years. After all, the typical homeowner lives in a house for a median of 10 years before selling, NATIONAL ASSOCIATION OF REALTORS® data shows.

Look at the House Through the Lens of Resale

All the real estate pros we talked to — no surprise here — emphasized resale. Take appraiser Michelle C. Bradley of Czekalski Real Estate Inc. in Natrona Heights, Pa. When she built her current home — a 2,200-square-foot ranch — she included a full, unfinished basement, even though she has no use for one and rarely ventures into it.

Why would she do that? Because basements are standard in her southwest Pennsylvania market. But Bradley’s not going to finish the basement until she’s ready to sell. That way, she avoids having to clean it and ensures she’ll install the most fashionable bathroom fixtures at sell time.

Her advice: “Don’t buy or build something unique that you can’t resell. If you’re not in an area with log homes, don’t choose a log home. If you’re not in an area with dome homes, don’t choose a dome home.”

Likewise, If you buy a home priced higher than average for the area, it’ll be difficult to resell at a higher price.Read More InBuy Your First Home in One Year: A Step-by-Step Guidedon’t buy a home that’s not in line with the neighborhood’s average price . When you go to resell, you’ll find yourself in an uphill battle to maintain your higher price.

Other advice from the pros: Watch out for unfixable flaws that could affect resale, like:

  • What’s next to the home, such as vacant land that could be developed, high-traffic businesses, noisy power generation stations, a cell tower, etc.
  • Lot issues, such as a steep driveway that could double as a ski slope in winter, or a sloped yard that sends water special delivery to your foundation.

Of course, a home isn’t just about resale. It’s just one factor to consider. Remember the first point: Be willing to compromise for your priorities. If the home meets your priorities and you’re going to stay there awhile, then resale might be where you compromise.

Related: Are You Making a House-Hunting Etiquette Mistake?

Christina Hoffmann also contributed to this story.

Buy & Sell, Buy, House Hunting
has been writing about real estate for more than two decades. She lives in a suburban Baltimore Midcentury modest home on a 3-acre lot shared with possums, raccoons, foxes, a herd of deer, and her blue-tick hound. Follow Dona on Google+.