Buying a home is the most significant financial decision that some people will ever make. The thought of finding the perfect home is exciting. So much so that some will dive right into the search process on day one only to find out later that they have to backtrack once they identify a home they would like to purchase. Why is this? It’s because they didn’t do their homework – they were prepared to look, but they weren’t prepared to make an offer and buy, and being unprepared sometimes forces potential buyers to watch helplessly as more prepared buyers move in and buy their dream home out from under them. Instead, your goal should be to be able to move quickly and efficiently when you find that perfect home. Here are some basic questions that you should answer for yourself BEFORE you begin to look at homes.
Why are you buying and is this the right time for you to take this major step?
There are many advantages to buying a new home. Finding a place that better suits or enhances your lifestyle, your work life or your family needs can represent the beginning of a new and wonderful future. However, try to avoid making such an important decision during periods of your life when your job, family, financial or personal situation is creating significant stress in your life. A home purchase may be the right choice for you, but this may not be the right time to take this step.
When you feel confident that your reasons for buying are sound and the timing is right, you need to evaluate your finances.
How much can you afford to spend on a new home and how will you pay for it?
Nothing that you do to prepare for a home purchase will reap greater benefits than solid financial planning at the outset. Many buyers spend a lot of time looking at homes in a particular price range only to learn later, much to their surprise, that they cannot afford to buy a home in that range.
It is useful to think of this as a two-part process. The Part One of financial planning begins at home with you organizing your financial information and writing down the answers to several key questions:
- What is your current income?
- How reliable is this income (e.g. how long have you worked in your current position, how stable is this industry, etc.)?
- What are your current monthly expenses and how do you estimate these would change if you were to buy a new home?
- What debt do you currently have and what is the schedule for repayment of this debt?
- How much have you saved in liquid assets (i.e. cash or investments that can be easily converted into cash if needed)?
- What is your current credit rating (e.g. FICO score)?
- What is your plan, in general, for paying for a new home (e.g. pay all cash, apply for a mortgage loan, borrow from a relative, etc.)?