Purchasing a home is one of the most important and greatest financial decisions you will ever make. With that being said, there are many considerations and factors that you should go over before you put in an offer on a home. Purchasing a home isn’t as easy as they make it look on television or in the movies. There is an entire process that you must go through. You always want to be one step ahead and be prepared before making such an important financial decision.
Factors to Consider When Buying a Home
Before you get your heart set on a house, you should get your finances ready to make such a large purchase. Look to the factors below to ensure you are ready to put in an offer.
Your Down Payment
As you likely know, purchasing a home requires a down payment. The Federal Housing Administration requires only a 3.5 percent down payment1 on the purchase price of the home, providing your credit score is 580 or above. However, this is just a bare minimum and it is recommended that you save much more than 3.5 percent. Having a higher down payment improves your loan to value ratio, which can increase your chances of getting approved for a loan. You will also be spending much less on interest, which indirectly increases the overall cost of purchasing your home.
When you are saving up for a down payment on your home, try to save as much as you possibly can. Most professionals recommend saving up at least 10% of your desired home’s purchase price and try to save up 20%. If you do this, you will have to borrow less from the bank, and you will likely save a great deal of money on interest. This may make your finances tight for a little while, but you will be glad you put as much money towards your down payment as possible.
Your Credit Score
Just like with any loan you take out through a financial institution, your credit score will be checked when purchasing a home. Banks check your credit score and your credit history to see if they can trust you to make your monthly payments to them, paying them back for the loan of the house. So, before you try to get a loan to pay for your beautiful new home, take a look at your credit history. Have you made all of the payments for your credit card on time? Did you apply for another loan recently and had your credit score checked? Any recent check of your credit score can potentially decrease your credit score and may affect the likelihood of getting approved for a loan.
If you know you don’t have a high credit score (at least 650), we recommend waiting to go house shopping. Take a few months to consistently pay your bills before they are due and give it some time to allow your credit score to increase. If you can get your credit score above 700, you will be much more likely to get approved for a loan by your bank.
Can You Afford the Monthly Payments?
Maybe you have a 20% down payment saved up and a 720 credit score already. Both of these things are great, but you may not be ready to purchase your home yet. What is not included in the purchase price of your home are the additional fees you will have to pay. Common fees associated with homes are Homeowners Association (HOA) fees, home insurance, property taxes, and more. If you are purchasing a larger home, you can expect your utilities to increase as well. All of these expenses add up, and just because you can afford to pay your bank back each month, it doesn’t mean you can afford the home.
Before you sign off and get the keys to a house, do some quick calculations and go over your budget. Add up all of the monthly fees associated with your neighborhood and city, estimate how much you will spend on utilities, add the cost of insurance for the home, and finally add the monthly payment you will be sending your bank. Can you comfortably and realistically afford the home after you pay income tax? Many financial professionals recommend spending under 28% of your gross monthly income on all housing costs, and this is a smart rule-of-thumb. No matter what rule you follow, be sure you can comfortably live with all of the costs associated with owning a home.
Furnishing the Home
If the home you are wanting is much larger than your current living situation, consider how much furniture you will need to purchase. Although this may seem like a minor expense, the cost of new furniture can add up very quickly. For example, if you have to furnish four new rooms, you may spend up to $10,000 depending on the materials and quality of the furniture. People who are completely starting from scratch with their furniture and are moving into a three-bedroom home spend about $19,5002 on average. If you are fine with having some empty rooms for a while until you have the money to spend, this may not be an important consideration for you. However, if you would like your home to be completely ready to be lived in, factor in the cost of your desired furniture.
The Cost of Moving
Last but not least, you should consider the cost of moving into a new home. The cost of moving can be very expensive, especially when you hire movers to help you. This total will depend on where you are moving to and how much furniture you are bringing. We recommend getting a quote from different moving companies, so you are spending the least amount of money as possible. However, we recommend that you research the moving companies, checking for reliability and customer satisfaction, since spending the least may cost you more in the long-run. If you would like more information on how to save on moving, our article, “5 Ways to Save Money When Moving” can be very helpful for you.
Financial Decisions Around Buying a Home
When you are getting ready to purchase a new home, consider the factors listed above. You will be one step ahead and will be as prepared as possible to move into the home of your dreams. If you would like more financial insight and individual recommendations, please contact one of our financial professionals. We would love to help you get your finances ready to purchase your brand-new home.
1 “What is an FHA Loan? – The Complete Consumer Guide” Anonymous Zillow, June 6, 2013
2 “What is the cost of furnishing a home?” Helen Christie What House?, May 30, 2017
Equitable Advisors, its affiliates, and financial professionals do not offer mortgage loans, real estate brokerage or any related advice or services. You should consult with a qualified and appropriately licensed mortgage professional, real estate professional, tax professional and legal professional regarding your needs, questions and particular circumstances.