Am I Ready to Buy My First Home?

Find out whether you're really ready to start shopping.

Homeownership can be great, but it isn't for everyone, or at least not right away. Unless you really can't stand your apartment or your landlord, it's best to think seriously about whether your lifestyle and finances are suited to purchasing a house of your own. Here are the top criteria pointing to a "yes."

You Plan to Stay Put for the Next Three to Five Years

If you'll be off to grad school in a year or are angling for a job transfer, why bother? Buying a house involves a lot of upfront effort, and you won't want to have to do it again in a year or two.

Also, the transaction and closing costs of a home purchase (described below) become less worth paying if you will have to pay them all again soon, for another house.

What's more, if you end up needing to move during a market slump, you might have to sell the house for less than you purchased it for, not to mention pay commissions to the real estate agents (averaging 5-6% of the house purchase price, or $5,000 for every $100,000).

You've Got Enough Cash Saved Up for the Down Payment and Closing Costs

There are three parts of the purchase that you'll need to prepare for: your down payment, your closing costs (including various fees and charges to arrange your mortgage loan), and your mortgage itself. Even if your income is reasonably good, you'll need cash in hand for the first two items on this list.

A down payment of 20% is standard, unless you qualify for an FHA-backed loan.

Closing costs typically include not only various transaction costs, but homeowners' insurance, mortgage insurance, your share of that year's property taxes, and more. The total is usually around 2%-3% of the house price, depending on what state you live in, what kind of mortgage you get, and more. See www.bankrate.com for a state-by-state analysis of the loan portion of buyers' closing costs.

We'll talk about the ongoing mortgage cost below.

You Have a Solid Credit History

In order to get a mortgage with good terms, you'll need a clean credit history. Order your free credit report at www.annualcreditreport.com and resolve any errors you find on it.

Your Budget Can Handle Ongoing Costs of Home Ownership

If you never balance your checkbook, occasionally forget the credit card bill, or hand a tax preparer an overstuffed shoe box in April, it's time to get organized. You'll need to get a handle on your budget, and set aside extra money for not just the mortgage, but house repairs and annual property tax and insurance bills (ouch).

Take a look at whether you really have cash to spare at the end of each month. Add up out how much income you bring in after taxes and other withholdings, then add up how much you spend monthly for regular costs (food, transportation, clothing, and regular debt payments, but not rent), plus occasional costs (dental visits, car insurance). Subtract the second figure from the first, and you've got the amount of your monthly spare cash.

Next, compare that amount to your expected regular house costs. Start by getting an idea of what a mortgage will cost you, using a mortgage calculator. Also budget for homeowners' insurance (usually between about $500 and $1,300 per year), maintenance (roughly 1% of the house's purchase price each year), property taxes (check your state's average), utilities, and decorating and furniture.

You Don't Mind Devoting a Chunk of Your Life to Home Maintenance, Repairs, and Improvements

Some homeowners like nothing better than to pull out the tools, buckets, and plaster to paint the bedroom purple or retile the bathroom. But such projects can eat up your weekends, even if you're just overseeing contractors.

And those are the optional improvements. Every house needs basic fixups and ongoing maintenance. (Calling the landlord can sometimes start to sound pretty good.) Ask your home-owning friends with similar interests how maintaining their houses fits their lifestyles.

You might want to choose a lower-maintenance option, like a condo, where your monthly association fees will relieve you of maintenance duties.

You Have an Idea of How Much Houses Really Cost in the Area You Plan to Buy In

Browsing the real estate section of the paper isn't enough. You need to know what houses have actually sold for in the neighborhoods where you're hoping to buy, and whether that's within your budget. Local real estate agents can help you with this, and you can plug local addresses into a website that tracks recent, completed sales such as www.realtor.com.

Also start going to open houses, so as to get a sense of what's available at what list price (keeping in mind that the selling price may go higher or lower). Visit a wide range of houses, noting the numbers of bedrooms and bathrooms, special features, and overall charm, and how that translates into a list price and eventual purchase price.

If the seller has made pest or other inspection reports available, read them carefully, paying particular attention to the estimated cost of repairs.

You Wouldn't Be Financially Better Off Renting

Whether you want to buy a house is one thing, and whether it's a smart move money-wise is another. It's not as simple as merely saying, "My monthly rent check is x, and my monthly mortgage payment would be y, so I should [either rent or buy]!"

Buying a home has both hidden costs and benefits.

As a homeowner, you'll have to deal with new costs like homeowners' insurance, property taxes, and regular maintenance.

But you'll also get to enjoy new savings, like potential tax deductions for the interest you'll pay on your mortgage (if you itemize). And, you'll be building equity in a hopefully appreciating asset.

How might the costs balance out? Run some numbers with a Should I Rent or Buy? calculator.

If you're feeling ready to move forward, learn more with Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart, or How to Buy a House in California, by George Devine, Ira Serkes, and Ralph Warner.

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