Quiz: Am I Really Ready to Buy a Home?
Home prices are on the uptick for the first time in several years, which means that you may have a limited window of opportunity to become a homeowner before prices shoot through the proverbial roof again.
I don’t have to tell you that buying a home is serious business, a major milestone, a huge responsibility, and probably the largest purchase you’ll ever make, but are you asking yourself the right questions to make sure that you’re prepared for all the amazing and not-so-amazing aspects of home ownership? (See also: 9 Costly Things New Homeowners Don't Prepare For)
To help you decide whether you’re ready or not, I’ve designed this quick quiz. Answers are below. No cheating!
1. When contemplating the decision to buy a home, what’s the first thing you should do?
- Contact a loan officer
- Take a good look at your finances
- Call a real estate agent
- Attend a few open houses
2. When you start looking for the perfect home, what should you have?
- Cash for a down payment
- A good credit score
- A steady source of income
- All of the above
3. What’s the best way to calculate the price range in which you should be shopping for a home?
- Your anticipated monthly payment is 30% of your income, to include your mortgage, taxes, and insurance fees
- Add up all your assets, and work with 50% of the sum
- Multiply your current rent by three
- Multiply your annual salary by 30, then divide it by two
4. How much cash should you save for a down payment?
- 7% of the purchase price
- 10% of the purchase price
- 17% of the purchase price
- 20% of the purchase price
5. To secure the best mortgage rate, what’s the minimum FICO credit score you must have?
6. How much money should you set aside for closing costs?
- 1% to 2% of the purchase price
- 3% to 6% of the purchase price
- 7% to 9% of the purchase price
- 10% to 12% of the purchase price
7. If you don’t have the cash for closing costs, you should put your dream of owning a home on hold.
8. The bank has approved you for a loan that exceeds the budget you set for yourself by $50,000. You should:
- Accept it. Now you can get a house with a pool.
- Politely decline and tell the loan officer where to stick it.
- Use the extra $50,000 to buy a new car.
- Reexamine your budget to see if you can afford it.
9. How long should you plan to live in your new home for it to make good financial sense to buy?
- 3 years
- 5 years
- 7 years
- 10 years
Before you can start the home-buying process, you need to examine your budget so you know where you’re at with your finances and to find out how much you can afford to spend on a home. Using your existing budget, it’s not a bad idea to create an anticipatory budget too, which should include your monthly mortgage payment, insurance, property taxes, and other associated costs of home ownership. This will help you determine if your budget can handle these expenses.
In this economy, cash for a down payment is important to a lender — it lets them know you’re a serious buyer and that you’re responsible — and a good credit score will help you lock in a low interest rate. Of course, to save for a down payment and establish a good credit score, you’ll need a reliable, steady source of income in the form of a full-time job.
Financial experts suggest that the percentage of your monthly income that you should use to establish a budget for home buying should be from 25% to 33%, which makes 30% a safe compromise.
If you don’t want to pay for private mortgage insurance, 20% of the purchase price is the sweet spot that you should aim for when saving for your down payment. Anything less will require you to purchase private mortgage insurance so the lender is protected from default on the loan. However, it doesn’t hurt to save even more than 20% to put toward the down payment so you can ensure that you get the lowest interest rate possible.
A FICO score of 760 or higher will help you lock in the best mortgage rates. If your score is lower than 760, you’ll still be able to purchase a home, but you’ll pay for it in the long run with a higher mortgage rate.
Between 3% and 6% of the purchase price of the home is the ideal margin of savings you should have for closing costs. These costs usually consist of loan origination fees, title insurance, attorneys’ fees, property taxes, transfer taxes, and other fees.
You don’t necessarily have to give up your dream of owning a home if you’re short on the closing costs. While it’s ideal to have that cash on hand to avoid a high monthly payment because you had to finance the closing costs, you can also ask the seller to cover closing costs, especially if the place is a fixer-upper.
Remember when the government bailed out the banks a few years ago? That was largely due to large loans given to homeowners who couldn't afford them, resulting in the inability of the homeowners to pay them. To avoid the trap if the bank approves you for a loan more than you think you can afford, re-crunch your numbers to see what makes sense. Just because more money is available doesn’t mean you have to take it — because eventually you will have to pay it back.
It takes about five years to build up equity in a home, the amount of which increases as you make payments toward the mortgage loan. If you don’t plan to stay in your new home for at least half a decade, it may not be a good decision to buy.
Buying a home is a big decision and one that will change your life — most of the time for the better — but it’s important to ensure that you’re financially secure before embarking on this milestone. While home ownership comes with plenty of perks, it also comes with lots of problems — problems that you have to fix, and fixing them will usually cost money. Use this quiz as a guideline to help you make the initial decision on whether or not to start the home-buying process, but ultimately it’s your own common sense that will dictate if you’re ready to take the plunge yet.