real estate

How to know when you're ready to buy a home

Handing over house keys
Highlights
  • Are you ready to buy a home? There's more to buying a house than affording the monthly payments.
  • Spend what you feel comfortable spending, not what a calculator says you can afford.
  • Research whether renting is more affordable than owning in your area.

Are you ready to buy your first home? Buying a home requires a life plan and a financial plan.

"Getting ready to buy a home should mean that the prospective buyers understand that there is more to homeownership than a housing payment," says Jim Walton, vice president of consumer credit with MetLife Bank in Irving, Texas. "Homeownership requires a commitment to a property and to a community."

Long-term commitment

In a hot real estate market, buying and flipping appeals to some buyers, but in a more stable or declining market, owning a home requires a longer time to build equity.

"Even in the Washington, D.C., area, where our market is relatively stable, I counsel buyers to look at a minimum of a three- to five-year investment," says Leslie Wilder, a Realtor with McEnearney Associates in Arlington, Va. "In other markets, I think you need to own for a minimum of five years or longer in order to recoup the costs of buying and selling. If you are not able to make that commitment, you are better off renting."

She also says: "Buyers need to think not only about what they want now, but also what they will want in five years. For example, if a couple wants to start a family, they might want to choose a home in a school district they prefer or to live close to work to shorten their commute."

Affordability

A lender can tell you the maximum mortgage you qualify for, but financial experts recommend that you determine your own upper limit for a housing payment.

"A lender will look at your debt-to-income ratio, but at the end of the day you need to be comfortable with your mortgage payment and also prepared to save for other financial needs even after you become a homeowner," Walton says. "Buyers should take a disciplined approach to saving for a down payment, and then they need to be able to continue to save after they buy, for home maintenance and emergencies."

 

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Marc Schindler, a Certified Financial Planner and owner of Pivot Point Advisors in Bellaire, Texas, says he looks at real estate as an illiquid investment.

"If you needed the cash from the sale of a home, it would take time to sell and cost about 7 percent of the home value for transaction costs," Schindler says. "I would recommend that no more than 25 percent of your asset allocation should be in real estate. For someone young with few assets, that may mean postponing buying a home until you can save more money."

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