5 Key Questions Potential Homebuyers Must Answer


The decision to buy a home is complicated, but answering these five questions can bring some clarity to this big-ticket decision.

1. Would it be cheaper to rent? If you're thinking of scooping up a condo these days, your best bet is taking a gamble on Sin City. Buying is a cheaper choice than renting in nearly three-fourths of the biggest U.S. cities, with foreclosure-flooded Las Vegas being the best place to do so, followed by Detroit; Mesa, Ariz.; Fresno, Calif.; and Arlington, Texas.

San Francisco-based online real estate firm Trulia compared the price of buying and renting in the 50 most populated U.S. cities. Price-to-rent ratios were calculated using the median list price compared with the median rent on two-bedroom apartments, condominiums, and townhomes listed on Trulia.com as of July 1. Don't think about taking out a mortgage in New York; Fort Worth, Texas; Omaha, Neb.; Seattle; San Francisco; and Kansas City, Mo., the survey suggests, where inking a lease is the more frugal option. Here's a rundown of cities where it makes the most sense to rent and where it's worthwhile to purchase a home.

2. How long do you plan to live there? If you can purchase for the same or less as renting, it makes sense to buy as long as you don't plan on relocating in the next few years, according to Craig Strent, CEO of Rockville-based Apex Home Loans Inc. Unless you plan to stay in the home for at least a few years, recouping your closing costs may not make buying worthwhile.

"For these particular buyers, I would tell them to not make the same mistakes as past homebuyers who were caught up in the housing frenzy," he said. "Buy when they are ready, not because it may be a good time to do so."

3. Is your credit good enough to qualify for a good rate on a mortgage? Thirty-year fixed-rate mortgages are at a record low 4.15%, according to Freddie Mac, making it a great time to buy for those who qualify. But that pool is small, thanks to picky banks and fewer people who can afford loans.

Lenders have started to rein in their reckless lending habits of recent years, so you must have a strong credit score to get the best interest rates. It might be worth putting off a purchase for a year while you improve your score. (Remember that the Fed has vowed to keep rates low for quite a while, so much steeper rates are not around the corner.)

4. How much money can you afford to put down? Try to put at least 5% down and avoid more expensive Federal Housing Administration loans, says Strent. Ideally, he continued, buyers should put 20% down.

5. Will the purchase leave you strapped for cash? "Price alone should never be the sole factor in deciding to purchase a home," said Ken Shuman, head of communications at Trulia. Instead, he suggests, buyers should first ask themselves whether they plan to live in the home for at least seven to 10 years, could make monthly payments on the house, and have enough cash in the bank for a down payment and an additional six to eight months' worth of mortgage payments.

Motley Fool contributor Tierney Plumb holds no positions in any of the stocks mentioned.