The purchase of a home is a major financial commitment. While it is a decision that should always be made with care, the weak real estate market means you should exercise even more caution. Don't let the excitement of looking for your dream home prevent you from following these tips:
Set an upper limit for your home's purchase price and don't exceed it. Before you start looking, carefully analyze your expenses and decide how much you can afford to pay for a home. An often-cited guideline indicates that your mortgage payment, insurance, and property taxes should not exceed 28% of your gross income. While lenders recently allowed up to 40% of gross income to be spent on housing costs, you will likely find more lenders are going back to traditional guidelines. However, make sure that you are comfortable with the mortgage payment. Don't raise the limit as you look at houses, thinking you can reduce your living expenses to cover the difference. It's very difficult to change your spending habits.
Consider how your down payment will impact your home's financing. A lower down payment makes it easier to purchase a home, but also increases the size of your mortgage. While in the recent past you could get by with no down payment, more and more lenders are now requiring a sizable down payment. Expect to put down at least 10% to 20% of the purchase price. With a down payment of 20% or more, you don't have to obtain private mortgage insurance, which typically runs from .25% to 1.25% of your total mortgage amount.
Familiarize yourself with housing prices in the area. No one likes to purchase a major asset like a home and then find it decreasing in value. However, it is difficult to predict market bottoms, and you may not be able to delay a home purchase until there is clear evidence that the market has bottomed. To protect yourself, get a comparative market analysis to see how much homes have sold for in the recent past. Base your offer to purchase a home on that analysis, even if your offer is substantially below the seller's asking price.
Choose a home you'll be comfortable living in for several years. When home prices are rising rapidly, you can purchase a home, live in it for a couple of years, and then sell it at a profit. With modestly increasing or declining prices, it's difficult to sell at a profit after a couple of years, due to sales commissions and other costs associated with buying and selling a home. Thus, you should purchase a home you'll want to live in for at least five or 10 years. If you know you'll need to move in less than five years, consider renting.
Sell your current home before buying another home. It is taking longer to sell homes now. If you can't afford mortgage payments on two homes, make sure you sell your current home before purchasing another.
Consider resale value while you are purchasing. While you may like unusual features, consider how likely other buyers are to want those features. Be cautious of purchasing a home with a much higher selling price than other homes in the area. Homeowners typically want to be surrounded by homes of similar size and value.
Get a professional inspection. While the home may look like it is in great shape to you, an inspector will check things like the heating and air conditioning systems, plumbing and electrical, roof, foundation, drainage, garage, and basement.
Review your options before selecting a mortgage. Now is not the time to look at exotic mortgage options. Consider basic mortgages. Fixed-rate mortgages are typically a good option for homeowners who plan to stay in their home for many years. Adjustable-rate mortgages (ARMs) are popular with homeowners with rising incomes, those planning to move in a short time, and those who want the short-term cash flow benefits of lower interest rates. If you're not sure which is better, consider a convertible mortgage. These mortgages allow you to switch from an ARM to a fixed rate, from a fixed rate to an ARM, or from the original fixed rate to a lower rate if rates decline.