By Christine Ryan Jyoti
When Juli Ana Grant saw the run-down Victorian house in rural Hughesville, Maryland, it was love at first sight. The property, with its three acres, reminded her of growing up on a farm -- and she immediately began fantasizing about the animals she could raise there.
"I was very tempted because the house looked like a castle and the barn was perfect, so I nicknamed it 'Castle Farm' and dreamed of owning horses for a few weeks," says Grant, 39, a government employee.
The best part? At $310,000, the property was well within her budget of $400,000.
But there was a rub: Moving there would have meant a three-hour commute -- not to mention that she'd be far from most everything (and everyone) else. And that made her stop and ask: Am I ready to buy a house?
An Investment Vs. Reality
"The real reason I was looking at buying was because everyone says it's a great investment," Grant says. "But ultimately, wisdom and reality set in. The home was far away from my job, my family and the city. That would have gotten old fast."
Like Grant, many house hunters feel pressured to buy because they don't want to keep "throwing away" money renting, or they simply fall in love with the white-picket-fence listing they spot online. Neither of these, however, are good reasons to take the purchasing plunge.
"It's so important not to romanticize home-buying," says Bree Al-Rashid, a managing broker for Redfin who's based in Seattle. "The truth is that homeownership is an endurance race. The more tough preparation you do up front, the better you'll feel from beginning to end."
Translation: It takes more than just plunking down a 20 percent down payment to call yourself ready. You have to be financially, emotionally and mentally prepared-or risk becoming one of the one in four homeowners who feel buyer's remorse.
To help you figure out if you-and your finances-are truly prepped for the world of homeownership, we spoke with real estate pros and one of our own CFP®s to fashion seven questions you should ask yourself first. The answers can mean the difference between starting the house hunt-or staying put until the time is right.
1. How Healthy Is My Credit Score?
A mortgage can be one of the biggest financial obligations you'll ever take on, so why add to that burden by paying a high interest rate? Fact: The lower your credit score, the higher your interest rate is likely to be. And that's why it is important to boost that three-digit number as much as you can before you even get close to the borrowing stage.
One way to help boost your credit health is to get current on your credit card and loan payments, says Matt Shapiro, a certified financial planner with LearnVest Planning Services. In fact, he suggests aiming to have about three straight years of on-time payments under your belt before looking to buy a home, because the more recent a late payment is reported, the more likely it is to ding your score. Of course paying down your debts will also help improve your debt-to-income ratio, which lenders take into consideration when determining how big of a mortgage to give you-or whether to give you one at all.
"No one's going to say that you can't have any debt before you buy a house," Shapiro says. "But depending on how big a percentage of your income is going toward paying student loans, for example, you may not get approved for a mortgage." One other important thing to watch-especially as the holidays roll around-is to limit the amount of new credit cards you open, which can hurt your score by lowering your overall length of credit history.
"If you're, say, opening five retail cards at different stores to get a discount, someone looking at your report might think, 'This is a person who needs credit really badly, and I don't want to lend to them.' "
2. Am I Making Good Progress on My Savings?
No, we're not talking about saving up for your down payment here. It's important to feel confident that you can continue to contribute to your key financial goals, while also juggling a house payment. The last thing you want is to have a big mortgage waylay your retirement plans or your ability to have adequate emergency savings, which should be six months' worth of take-home pay for most people.
"It's really critical that your emergency fund isn't part of your down payment fund," Shapiro says. "I have clients who have a big chunk of money that's 'kind of an emergency fund, and kind of a down payment fund,' and then a month later, their water heater breaks down or the roof springs a leak."
When that rainy-day fund dries up, many homeowners turn to credit cards to cover much-needed repairs-subsequently falling into a debt cycle, he adds.
As for retirement, you want to make sure a mortgage payment won't mean cutting back on 401(k) or IRA contributions. "Generally speaking, people should be on track to replace 70% to 85% of their pre-retirement income in retirement before they start saving for a down payment," Shapiro says.
3. Have I Accounted for All of the Costs of a Home?
Your mortgage payment isn't just your principal and interest; it also includes the taxes and insurance you'll pay on your home. Add to that the cost of utilities, periodic repairs and regular maintenance-think lawn care, gutter cleanings, snow removal, pest control and the like-and the costs of homeownership can quickly snowball.
On average, you can expect to pay between 1 percent to 4 percent of your home's value for maintenance a year, depending on the age of the house. If you're handy and proactive, those costs could be much lower, but don't delude yourself into thinking you can be Ms. Fixit if you're the type to have your plumber on speed dial.
"If you're not handy, and you just want to hire someone to deal with the upkeep of the house, you could pay double that amount," Shapiro says.
He also suggests taking a look at local tax records to get a feel for what you could potentially pay on property taxes. Some states even offer a free, online property tax estimation tool to help you get your numbers straight. Just keep in mind that, depending on how the laws have changed, your tax burden may be a lot more than the current owner's, Shapiro adds.
Once you have an estimate of how much you think your mortgage and maintenance fees would be, plug the numbers into your budget and try these costs on for size.
"Living off that hypothetical budget for two or three months is probably one of the best ways to figure out your readiness for a home," Shapiro says.
4. Is My Job Secure?
Landing a great new gig-and the pay bump that comes with it-doesn't automatically elevate you to home-buyer status.
Before committing to purchasing anything, consider how long you've been with your employer, what your future job prospects look like-and even what your company's prospects look like. Then ask yourself this pointed question: How will I pay my mortgage if I lose my job?
Of course, that's where your emergency fund comes into play. Would you have enough to cover your housing expenses until you find a new job? Or would you have to consider other measures, like taking on a renter, to help cover your mortgage?
"If you have dependents, an income that's difficult to replace, or work in an industry that might require relocation, you'll want to be sure to have a strong contingency plan in place," Al-Rashid says.
Kate Sheckells, an agent with Evers & Co. Real Estate in Washington, D.C., recommends factoring in the local job market when trying to decide where to buy. "Is the area flush with potential stepping stones in your field?" she asks. "You want to make sure you have viable employers where you live."
After all, having more opportunities could improve the speed with which you bounce back should you lose your job.
5. Am I Committed to the Location?
"Location, location, location-that phrase was coined for a reason," jokes Melanie Wolfe, an agent with Universal Realty in Henderson, Nevada. "It's one of the first things that my buyers ask about when they begin a search for a home."
But just because everyone's clamoring to get into a new ZIP code, or your dream home happens to be located there, doesn't mean that the neighborhood will necessarily be the right fit for you. So try "dating" the area you're considering by dining at local restaurants, testing out transit and commuting options, and exploring parks or other public amenities at different times of day, suggests Al-Rashid. Resources like Walk Score, which measures the walkability of cities, can also help by providing information on how cities fare with public transit, availability of shops and crime.
You'll also want to do your research and be aware of any pending local redevelopment plans, adds Sheckells. Are new schools being built? Is a mall being constructed down the road? These are changes that could impact your quality of life now-as well as your home's resale value in the future.
6. How Long Do I Plan to Live in the Home?
As with any investment you add to your portfolio, purchasing a home is something you should be committed to for the long haul. Wolfe advises clients not to buy unless they plan to stay in their homes for at least five to seven years. "A home is a long-term investment," she says. "Real estate can be volatile, and I don't want clients to have unrealistic expectations [about quick gains in value]."
Case in point: Wolfe recalls clients who became skittish about dropping property values when the markets tanked in 2007 -- and ended up short-selling their homes. "Just a few years later, our market bounced back and most of those clients would have been OK [if they'd stuck it out], but now they have a short sale on their credit report and are renting," she says. "They made quick decisions that were not in their best interest for the long term."
Looking at your home through a longer lens also means you need to think as much about your future housing needs as your current ones. Are you expecting to grow your family? Are you going to get married-or divorced? Will you be changing jobs?
Make it a point to factor in these possibilities, because if you are anticipating a lot of unknowns, it might be smart to hold off a bit on buying a home, suggests Al-Rashid.
7. Am I Mentally Ready to Be a Homeowner?
If your finances are primed for home ownership, but your heart and mind aren't quite as pumped, now may not be the right time to take the plunge. "Many people decide to move during a time that is coupled with another life event," Al-Rashid says. "If you are still psychologically or emotionally distracted by that event, you might be better off renting for a year and returning to the hunt later as a more focused buyer."
The type of home you're interested in can also factor into your mental readiness. You may have dreamed of rehabbing a fixer-upper, but realistically, are you ready for that kind of ongoing financial investment (and stress!)-not to mention the elbow grease? "A basic rule of thumb is that the less risk you can handle, the newer the home you should probably consider," Al-Rashid says.
At the end of the day, remember that becoming a homeowner means entering a relationship that has no easy way out. "It's a long-term commitment with many ups and downs," Schekells says.
And that's ultimately what kept Grant from moving forward with becoming a homeowner. After she gave up on the idea of owning a farm, she decided instead to buy an apartment in the city. She had all the paperwork in place and had been approved for a mortgage-and then realized she wasn't mentally or financially ready to make such a commitment.
"While the apartment was affordable, it would have taken away my ability to do much else," Grant says. "I wouldn't say, 'I am never going to own,' but it doesn't bother me to sit back until the time feels right-and when [owning a home] won't impede my ability to live life the way I want to."
By Christine Ryan Jyoti