By William Sun
A happy, prospective family has just moved into the new neighborhood. As they begin looking into buying a house, one stands out, with its beautiful exterior and colors, numerous rooms, and extensive backyard. When they finally buy that house, all seems well. Within a week, however, ghosts, serial killers, and other paranormal forces terrorize the family. If you are in touch with pop culture, this trope of a “haunted house” is nothing new. While the factor of ghouls potentially haunting your house isn’t something that you would usually have to consider, a multitude of other elements still remains to examine. As young adults, it’s critical to understand how to make safe, secure, and beneficial decisions when buying a future home.
While it can be extensive and complicated, the basic process through which people purchase and secure a home can be summarized in just a few steps.
Check for financial stability and willingness to make a commitment: these could include credit score, liquid assets, and debt-to-income ratio.
Set a budget for housing while also saving up for the appropriate down payment- the money that a buyer pays upfront in a large/real estate purchase. Make sure to take into consideration the mortgage- a loan used to secure a piece of land that will then be paid back to the lender.
Spend time carefully looking through multiple houses, potentially with the aid of a real estate agent.
Make an official offer on the desired house (Be prepared to negotiate or back out based on the pricing. Set a budget for the home and stick to it).
Get a home inspection done to ensure that the house is structurally and mechanically sound, making sure to have any necessary repairs or changes done.
This extremely simplified version of the home-buying process already highlights some of the greatest concerns that must be addressed before any houses are even looked at.
Current Financial Status
Before you go looking for any huge living rooms, pools, and wide backyards, you must first analyze whether or not you are financially stable enough to handle such a large purchase. Several factors can be used to quantify whether or not you are even able to afford a house.
Debt-to-Income Ratio- A debt-to-income ratio (DTI) is essentially all of your monthly debt payments, divided by your total monthly income. It serves as a measure of how much actual income you get to service debt. For instance, a 15% DTI ratio simply means that 15% of your income goes towards debt payments each month. As such, a low DTI ratio means good financial stability and the ability to handle debt. High DTI ratios, however, show that an individual is devoting too much of their monthly income to debt payments, demonstrating a lack of ability to handle more debt. Thus, many Mortgage companies often use this as a metric to determine whether someone would be able to handle a loan or able to borrow money. Typically, the range of acceptable DTI ratios is under 43%, though the ideal target DTI would be below 36% with no more than 28% going towards mortgage payments (1).
When looking at your own DTI ratio, try to make sure it is within the acceptable range. If not, you could lower it either by decreasing the debt payments or increasing the monthly income. For example, let’s say that your DTI ratio is 20%. If you pay off a full car loan of $2,000, your monthly debt payments would be reduced, leading to a lower DTI ratio.
Credit Score- A credit score is simply a number assigned to a person, representing their ability or history of being able to repay loans. Various factors, such as how far you fall behind on debt payments, how many accounts indicate late payments, or the raw amount of money you owe, all contribute to your credit score. For more information, check out this article on credit scores. Like any other significant purchase, a credit score is critical in determining whether you are able to buy or handle the mortgage/debt that comes with buying property. Not only does a credit score show lenders or realtors how stable your financial situation is, but it also possibly allows you to qualify for lower interest rates. For instance, a credit score of 620+ allows you to qualify for conventional loans, while scores higher than 580 can qualify you for FHA loans, which often have slightly higher down payments. This is important in making sure that your debt payments per month do not spiral out of control, possibly leading to an even worse credit score.
Some simple tips to improve credit score range from just paying off debt on time to applying for fewer credit cards as it builds hard inquiries on your report.
Down Payment- Down payment still is one of the biggest first obstacles to many prospective house buyers. Currently, with the stagnating economy, rising rent costs, and the potential burden of student debt loans, it is extremely difficult for many people to save enough money to make a significant down payment. While it is possible to simply put down a smaller down payment if it is essential, a bigger down payment proves to have much more positive effects. Similar to credit score, bigger down payments may also qualify you for lower interest rates by demonstrating to lenders that you are able to handle debt. Moreover, it bolsters your own reputation as a house buyer, making you seem more reliable and less of a trouble. Finally, in the long run, big down payments can lead to lower monthly mortgage payments by decreasing the amount still needed to be paid.
To save up for bigger down payments, multiple steps could be taken such as starting with an automated savings plan, taking a second job, or paying off high-interest loans and debts.
Of course, the most glamorous and prominent aspect of house-buying- is the house itself. Depending on each person’s situation, everyone has their own perfect house. It is up to you to consider all surrounding factors when looking at houses in your area.
Size/Layout- Based on your own lifestyle and home uses, the size, and layout of your new house are critical to ensure. The number of bedrooms and bathrooms may vary based on family size. If you plan on expanding your family or expect a lot of guests, a house with extra bedrooms may be the right choice. Moreover, the layout of your kitchen is also significant. A passionate chef may want more kitchen space than someone who eats takeout daily. Other features, such as a pool, garage, and backyard, depended on each person’s lifestyle. For instance, someone who works out a lot may want more garage space to build a home gym, while a basketball player may desire a bigger backyard for a hoop. Make sure to take all the time to look at every part of a house and consider not just yourself, but your potential family/friends and future.
Location/Community- The surrounding area of a house is equally as important as the house itself when it comes to buying the house. Considering that this may be where you live the next 20 years of your life, you would want to make sure the neighborhood is as best as it could be for you. If you are one who has a passion for nature and hunting, a house more situated near the forests may be right for you. On the other hand, city-loving folk may love houses that are closer to bigger communities. Even something as small as the noise pollution within the area may affect your decision to buy a house. In addition to lifestyle needs, family and job opportunities are other factors to consider. The schools in the area, the local culture, and the booming industries/economic growth of a particular city/area must be examined. Without taking careful consideration of these factors, you may feel isolated in an area, or worse, completely stranded without a chance for growth.
Costs/Maintenance- One of the biggest factors to consider is any potential costs that may come with each house. Typically, through house inspections and looking at the houses' age, one can estimate the number of payments needed to address maintenance, insurance, and other costs. In particular, older houses may be riskier in that they can require other extensive repairs and upgrades to modernize them. One important factor that comes with older houses is understanding building codes and laws that may have changed. Besides the age of the house, taking into account the costs of appliances is also critical. Costs may rack up very quickly from high-maintenance items, such as an expensive AC, elaborate pool, or garden.
The individual pricing and mortgage of housing is crucial to consider; yet, it can vary from place to place, time to time. Currently, the average price of housing is $428,700 for the entire US; however, that average skyrockets to $1.18 million in Silicon Valley. Thus, it is imperative that you make sure the purchase price, mortgage rates, and local markets of a house are all suited for you.