So, I think that buying a house can definitely test a relationships patience, especially when you consider tips one and two. Tip three is really research and understanding how that effects your house buying.
1. Know Your Budget
Most of us know that when you start to look at purchasing your home, these days it is extremely important to get “pre-qualified”. This is essential to knowing the top of your buying range from a bank’s perspective. What this really adds up to is how much you have going out and how much you have coming in each month as well as how much money do you have saved for your down payment and at what percentage you wish your down payment to be. (Little tip – I highly encourage 20% down if you can since Property Mortgage Insurance otherwise known as PMI is removed at that point and the new FHA rules have extended the length of time you must carry it even if you refinance.)
But that is only the first part of knowing your budget. General rule of thumb I was always taught is about 1/3 or 33% of what you gross should be channeled into your mortgage AND property taxes. That said, most of us enjoy life. So it is extremely important to determine what your REAL max is for your purchase price. There are things like the monthly payment, property and supplemental taxes, HOAs, utilities, etc. and how they fit into your monthly budget that truly have to be factored in.
When my husband and I were looking to purchase a home we were pre-qualified for almost a $100,000 over what we ended up purchasing our home for AND about $75,000 over what we felt our budget could truly afford. What does that amount to in real dollars…about $400 more each month in principle and interests and impounding for taxes! That’s a lot of money! Heck that’s a lot of shoes I could be buying! (My shoe wardrobe is to die for but I digress.) In reality that could easily be braces for kids, an emergency car bill or at the end of a year a vacation at $4,800 more per year.
First I recommend getting a mortgage calculator app or go to www.bankrate.com and use theirs. The advantage of bankrate.com is you can see what the average interest rate is for your area. Figure out what your pre-qualified amount’s mortgage payment will be. Then take pre-qualified amount times your area’s average property tax percentage and divide by 12 to get your monthly property tax impound. Where I’m at it averages 1.25%. Your real estate agent should be able to tell you yours. Then you will want to add both to other monthly expenditures you already have plus what you can expect/guesstimate for additional ones such as new utility costs for your new place, cable, internet, phone, and do not forget maintenance funds as every house WILL have something go wrong. And unless you want to have no life make sure you factor things like entertainment, vacations, etc. Then as a general rule add 10% for the unexpected. (I say 10% because life happens and the last thing you want to have happen is not have the funds for an emergency.) As an example, I had budgeted based on what others around me and we had experienced healthy utility costs but the house we purchased demanded more combined with rising utility costs for our area, our bill doubled. Thank God for that extra 10%.
If you do all that and you come out with a total that is less than what you are currently netting each month, you have more coming in after taxes than will need to go out, then WOHOO!!! You are ready and know your price max. If not, then you need to ask yourself what can or am I willing to give on. Vacations? Eating out? Purchase price? For my husband and I, we decided on the lower mortgage costs based on all other factors. If like us, you choose a lower mortgage costs, plug in purchases prices in to your calculator till you get the mortgage that fits your monthly budget. Then you will have your house buying budget.
Lastly, remember you will have additional closing costs outside of your down payment. Be prepared. Everything you have saved for your house purchase will need to cover your down payment, closing costs and escrow costs. All of this can definitely stress a relationship because priorities in budget and what is important to each really comes out in this process. My husband and I had long debates on many areas of disagreement. But doing it upfront saves yourself the heartache of falling in love with a house you can’t afford.
2. Know Your Must Haves, Wants, Be Nice, Tolerates and No Way in Hades
You might not be able to get everything you want but knowing these can help determine which house is right. This is so important, especially when there are two people involved. I always dreamed of a two story home – you know the white picket fence, family photos on the walls with Christmas garland on the stairwell. But those were wants. Non-negotiables are a different story. So hear is why the list is important…there are a lot of different houses out there. You have to be able to narrow it down and not waste your time in looking at everything. Buying a house takes time…sorting through multiple listings, seeing properties, TAKING VALUABLE TIME OUT OF YOUR DAY. My advice…Divide and conquer. Here’s how:
- Must Haves – These are your can’t live withouts. Minimum square footage – house and yard? Number of bedrooms? Planning on having kids or have them already? Do you work at home? Do you need “storage”? 1-story or two? Condo or house? Yard maintenance or someone else does it? Where? For my husband and I it came down to a minimum of 1600 square feet for the house. That may seem big to some and small to others but for us (okay mainly me who has always had the luxury of large homes) that didn’t feel so small that we were crowding each other. 5,000 square foot lot minimum- we wanted a backyard of some kind. I grew up on 20 acres and he had just moved out of a huge yard about 3 times as big so that was our compromise. A minimum of 3 bedrooms with the ability to add on a fourth in the near future – one for us, one for our son, one for my home office (business owner of 13 plus years – a MUST), and as we want more children before my son goes to college the ability to add a fourth was a must. Two baths minimum with one attached to the master (I have a 15 year old stepson…I really don’t want to do the mad dash from the bath to bedroom in front of him.) And lastly, it needed to be within easy driving distance of our son’s high school, even if we went out of district.
- Wants/Be Nice – These are the things that would be really nice but not deal breakers. In our case, my husband wanted a pool. I wanted a two story and an indoor laundry. We both wanted an attached garage. Some carried greater weight than others but they were not deal breakers.
- Tolerates – These are what you can put up with…near a freeway? Laundry in the garage? …but would really prefer if they didn’t exists. In our case, we really would have loved a ready to move into home but if it needed TLC or fixing up, as long as we could live in it while we did the renovations, we could tolerate it. (This became huge with kitchens for me…but that’s another post.)
- No Way in Hades – These are the deal breakers. Areas you will not consider moving to? Status of houses? No busy streets? These are just as important as must haves. For us, we both agreed anything beyond a certain radius was too far a drive so it did really restrict our area but it also focused our search. I am also claustrophobic so I couldn’t live in small bedrooms, low ceilings or closed in rooms. Know your lists and you will save time.
3. Know Your Market – In general is it a seller’s or buyer’s market, are investors a factor, etc. These are important to know and your agent should be able to tell you. Generally in a buyers market, there is an overflow of houses so you have a less competitive time with respect to price. You may have sometime to think on the house and perhaps you can go back to it. In a seller’s market, you may look at house online and, be prepared, may be bidding without physically seeing it (we did…bite my nails). When 10 buyers are looking at one home, you may find yourself going over asking too (did that too). Investors can be a factor when you are looking at short sales, REOs or run down or need to be modernized properties that are below market value. They know what it takes to make a house market ready and what it will costs and there is no emotion involved so they can pull a trigger fast and have the funds to do it.
Bottom line of all three of these tips is know your budget, know your lists, so you can pull the trigger when you see the house you want regardless of the market.
Hope you found this useful. See you next post.