Tuesday, September 18, 2018
Buying a Home


Because home ownership is a substantial investment and a long-term commitment, it is important to become as knowledgeable as possible about the process of buying a home. Obviously, you want to avoid ending up with a home you are not happy with.

You will want to find out all you can about how much you need to save for a down payment, about the process of finding the right home for you, about negotiating the best possible deal, and about closing the deal. Click on the tasks to the left to get help.

Buying a home isn't always a good idea. Sometimes it makes more sense to rent.

Not everyone should own a home. See what factors determine whether you should be a renter or an owner.

Everyone loves the idea of buying a home.  But owning a home isn't always a good idea.  Sometimes it makes more sense to rent.  Consider these factors to help you determine whether you should be a renter or an owner:

Bad Credit Report

Do you have bad credit? If your FICO score is below 550, you're probably not going to receive a good interest rate for a loan.  And, that kind of score could put you into the hands of a predatory lender, i.e. a lender who takes advantage of people requesting a loan.

Consider the following:

  • If you have a bad credit report, you should work on fixing it before applying for a loan.
  • Four late payments is enough to disqualify you from obtaining a loan.
  • You can order your credit report free online.

High Debt Ratios

Lenders consider two ratios: front-end and back-end.

  • The front-end is your mortgage payment, plus taxes and insurance divided by your monthly salary.
  • The back-end adds your monthly debt payments to your PITI payment before dividing that total figure by your salary. A 50% debt ratio is a high ratio. A high debt ratio means you may not qualify for the loan.

Job Instability or Relocation

How secure is your job? Is your company laying off? Could you be fired and, if so, how hard would it be to get another job right away?

Unemployment compensation is rarely enough to cover mortgage payments. Are you likely to be transferred to another city within the next two to three years? If you had to sell due to a job transfer, your property would need to appreciate at least 10% to cover the cost of selling; otherwise, you would lose money on the sale. When you buy a home, you should plan to stay put for a while.

Maintenance Issues

All homes require upkeep and maintenance. Not everybody has the skills, much less the desire, to tackle home repair projects.

In addition, many individuals can not afford to hire a professional to fix things that break. Ideally you would set aside 5% of the purchase price to cover maintenance and repairs when you buy a home.

When Renting Costs Considerably Less

If your mortgage payment would be triple the amount (or more) you would pay for rent, it might not make financial sense for you to buy. For example, if it would cost you $2,000 a month to rent what would cost you $6,000 per month to own, does it make sense to pay $48,000 a year more to own a home?

If you are in a 30% tax bracket, you might not come close to recouping the difference you paid. Say your deductible expenses are $5,000 a month; 30% of that is only $1,500, which would be your true tax savings per month. Would you spend $6,000 to save $1,500?1

Other considerations

Here are some factors, other than whether you can afford a new home, that you should consider when deciding whether to rent or buy a home:

  • When home prices are down, home ownership is a less valuable investment. (Of course, owning a principal residence is not just an investment.)
  • When comparing the costs of renting against the costs of owning, factor in the valuable income tax deductions available for mortgage interest payments.
  • You may not have to pay tax on the capital gain when you sell your principal residence.
  • In a period of high interest rates, owning a home is more costly.
  • Those who move frequently, for example every four years or less, are often better off renting than buying.2

1©2007 About, Inc., A part of The New York Times Company.
2©CPA Site Solutions

 

Determine if You Should Rent or BuyConsider the Tax AdvantagesDecide How Much to SpendWork With a RealtorFind the Right HomeNegotiate the Selling PriceArrange For a MortgageInspect the HomeGet Insured

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