From how much house you can really afford to how many coffee shops are nearby, here’s what you need to know before buying your first place
If you watched the 2008 mortgage crisis from the desk of your first job, you’re probably squeamish about jumping into the market yourself. Don’t be. Arm yourself with a great real-estate agent, then read on for what to look for and what to do to get your dream first home.
So you’ve saved a hefty 20 percent down payment…excellent. But don’t stop there. Banks check your recent purchasing history as part of the mortgage approval process. They’re looking for a steady cash flow and at your habitual spending habits to figure out if you’re a safe investment. So tamp down on spontaneous trips to Hawaii and other huge expenditures for 3-6 months before talking to a mortgage broker, and during the search and buying process. (Talk to your broker if you suspect your history might be problematic.)
With a down payment of 20 percent or more of your home’s expected purchase price, you’ll be on solid ground with most banks. To ensure the best loan rates, however, give yourself the same financial checkup the mortgage broker gives: Figure out your debt-to-income ratio by adding up your total monthly debt (including student loans and car payments) and checking to see that it’s no more than 36 percent of your monthly gross income. If it’s higher than that, take a year or so to aggressively decrease your debts. (Need help? Money Under 30’s Debt Payoff page offers a thorough roadmap.) Then run a credit check on yourself. 720 or higher is ideal. If it’s drastically lower than that, take the time to build it back up before meeting with a banker. Finally, stay in your current job. Many banks shy away from people who have switched jobs in the last two years or have a history of job hopping. Remember: They’re looking for a stable, sure investment in you, so take the time to clean up or bolster your finances even if it means delaying your house plans for a year or more. It will pay off in better financing and lower interest rates.
Now that you’re pre-approved, take a hard look at the amount: Is it a figure you can actually afford? Your monthly house costs should be one third of your gross income. This includes not just your monthly mortgage payment, but also property taxes, HOA fees, and other associated costs. (Your agent can give you ballpark figures for the neighborhoods you’re most interested in.) Factor these hard costs into a more realistic budget, and then consider the softer lifestyle implications of going higher. A payment higher by a hundred or two a month might seem easy to bear until you realize you’ll be dipping into your travel fund to cover it.
Even if you don’t have kids, these rankings are important. They affect resale value, for instance. If you’re in a desirable school district, you can expect future development and an increase in your property value, which could add up to a quick and profitable resell down the road. A school’s ranking also gives hints about the demographic makeup of the neighborhood. If it’s a top school, expect lots of families in the neighborhood. Niche.com and GreatSchools.org both present school rankings nationwide calculated with data from the Department of Education and local reviewers.
Nothing beats hanging out in neighborhoods you’re interested in (and striking up conversations with the people who already live there). But if you’re looking for hard data about amenities, public transportation options, walkability, and crime, head to the Internet.
AreaVibes.com ranks areas by total livability, including high-school graduation rate, crime, amenities, weather, and other important factors. It shares the data behind its scores and lets you compare neighborhoods.
For a deep dive into a neighborhood’s walkability index that includes public transit options and commute time projections, check WalkScore.com. Also check with the neighborhood association or city council about any building plans approved, and ask yourself if you’ll benefit from the development.
Finally, it’s a good idea to glance at police incidents in the area. Go to CrimeReports.com to filter a neighborhood’s submitted reports by time of day, type of incident, and more. Check out at least six month’s worth of data to get an accurate picture of overall police activity in the neighborhood.
Most personal finance experts say it’s best to live in a house for at least five years before reselling. If you move prior to that, the equity you’ve built up likely won’t recoup your closing costs. So picture yourself in five years: Will you be in the same job with the same commute? Will someone move in with you or will you have children? Would you like to get a dog or start working from home? Now think of Future You as you evaluate individual properties and make sure the house you love now is one you can live in comfortably for the next few years.
Disaster is the last thing you want to think about when you have dream-home buzz. But it’s worth inquiring and researching to see if the property you’re in love with sits on a flood plain or an earthquake zone, or is at risk from wildfires. If so, ask your insurance agent to estimate the extra cost to add natural disaster coverage to your policies, but also do some soul-searching: If the worst happens and you lost your home, are you the type to rebuild? More practically, will you spend each fire or rain season paranoid about potential disaster, lessening your enjoyment of your home even if nothing ever happens? If so, move on to safer ground.