Home Buying 101: Should You Buy? And When?

December 15th, 2008 categories: Home Buying 101

This is the first post in my Home Buying 101 series, now updated for 2009.

The benefits of owning a home are well-known - tax deductions for your mortgage interest, building wealth, using your equity to trade-up, being able to do with your home whatever you choose and the personal satisfaction of owning a piece of real estate. But it’s not for everyone.

Should You Buy?

This is a question you have to answer on your own. Here are some questions to get you thinking:

Can you handle it if you hear that real estate values in your area have declined? The reality is that real estate values are on the decline, with no one knowing when or where the bottom will be. However, if you don’t plan to sell over the next few years, it really won’t matter what your house would be worth on the market if you have no plans to sell or refinance. Some people, though, can’t stand thinking they “lost” money.

Do you have a steady source of income both before and after homeownership? If you’re about to change careers, having problems with your current employer, or your industry or company has a history of layoffs, you should hold off on buying a house in the near future in case you become unemployed and don’t have another reliable source of income.

What’s your credit like? You don’t need to get a credit report to tell you whether you’re likely to have good credit. If you have creditors calling you day and night or recently had a repossession or bankruptcy, then you probably don’t have good enough credit to get a loan. While you can’t change, you do have time to fix your credit and change your ways before getting a mortgage - this will improve your odds of getting a loan and getting a better rate.

Do you have money saved for a down-payment and closing costs? Typically, you’ll need at least 3% of the purchase price for a down-payment and between 2% and 7% for closing costs. However, some programs like CHFA offer loans to help with the down payment or to pay closing costs. VA and the USDA also offer 100% financing for certain borrowers and properties. If you can save 20% of your projected purchase price, this is best. You will avoid private mortgage insurance (a cost to homebuyers if you do not have 20% to put down) and will be in better position long term.

Can you afford to be a homeowner? Are you prepared to handle annual increases in taxes, increases in utilities, costly repairs such as a new roof, increasing insurance, etc? Read my guide to some typical repair costs.

Will you be able to manage if the property values decline and you have to sell? This is the risk of loans with 100% financing - if you take out a mortgage for $250,000 and one year later, your home is only worth $240,000, you still owe the lender $250,000 when you sell.

Can you stay put for a few years? In most cases, you want to plan to stay in your home for several years. With closing costs, declining values and the slowing market, you shouldn’t plan on selling for a profit or selling fast.

Do you really want to be a home owner? Owning your home can fill you with pride and a sense of accomplishment. But it can also be a pain. As the homeowner, you are responsible for lawn mowing, snow shoveling and general upkeep - even when you’d rather be doing something else. And if you don’t want the hassles of exterior maintenance, is condo living for you?

I also like this quiz for first-time homebuyers: First Time Homebuyer Readiness Quiz.

And When?

Any time can be a good time to buy, if you’re willing to put in the effort and work with a seasoned agent. Generally speaking, though, there are some times when you are likely to get the most for your dollar.

When there are a lot of homes on the market. When inventory is high, there are fewer people buying and therefore less competition. Buyers can shop around and find the best deal. If one seller isn’t in the mood to bargain, maybe someone else is. However, don’t be lulled into the thinking every seller will give you a deal. That’s just not reality.

When interest rates are low.

When very few people are looking. In New England, any time during the winter and especially at the end of the year. Great examples would include vacant properties and bank owned properties, where the owners have to worry about burst pipes or vandals. Even with houses that are occupied, less people are looking for houses at this time of the year and some sellers are happy to unload a house at a lower price just to be done with selling.

When a house has been on the market a long time. Especially in this market, homes that have been on the market longer than most (check the local absorption rate through your agent) are a goldmine. All buyers are looking at new listings but only the smart ones are looking at the old, tired listings.

Two things will work in your favor - the agent will be much more likely to push their client to accept a lower offer and the seller is tired of waiting for the house to sell so is likely to be more flexible.

Here are some additional articles you might want to read:

October/November 2008 Median Sales Prices By Town

Is Real Estate Ever Worth Nothing?

Not Everyone Deserves to Own a Home