Buying a home may be the largest, most satisfying financial transaction of your life. Finding the right house and getting a good deal can mean the difference between living in your castle — however small your kingdom may be — and dwelling in a home that consumes too much of your paycheck.
Here are five important questions to ask before you buy.
Important Questions Before Buying a House
1. How much house can you qualify for? Getting pre-qualified for a home loan can put you in a position of strength when making an offer. A seller may be inclined to take a lower offer from a pre-qualified buyer rather than a higher offer from a buyer whose ability to get a loan is still uncertain.
Getting pre-qualified also allows you go into the market knowing exactly what you can afford. That way, you are less likely to make an unwise purchase if you fall in love with a house that is too expensive.
So how do you pre-qualify? Like most loans, you need to provide:
Proof of income and W-2s for at least two years. Lenders also want to know how long you’ve been with your employer. For self-employed people, be ready to show two to three years worth of tax returns and any other proof of income you have, such as long-term contracts.
Bank statements for at least two months. The purpose is to confirm you have the assets to make a down payment without borrowing from other sources (such as family members).
Permission for lenders to pull your credit report. They want to know how debt level compares to income, how long you’ve had credit, how reliable you are at meeting financial obligations, and other factors. It would be wise to pull your own credit report and check it carefully for errors. Incorrect or outdated information can be fixed, but it can take time, so start early.
2. Is the house worth the asking price? Keep emotion out of the equation or you may pay too much. Ask your real estate agent for a comparative market analysis (CMA), which is a recap of real estate activity in the area. It provides a sort of snapshot in time, taking into account three to ten properties of similar size and amenities near the home. This report also gives details of square footage, total room count, and the number of bathrooms and bedrooms for each house. The properties in the report are either currently listed for sale, have pending sales, have recently sold, or were listed but have been withdrawn from the market.
CMAs are helpful but they have one major flaw. They do not take into consideration the condition of the houses listed. That’s why the completed sales are generally the most important portion. Completed sales represent not only what sellers think their properties are worth, but what others actually paid for them. Also revealing are the expired listings, which may indicate asking prices that were too high. A CMA may not differentiate between actual sales, pending sales, and expired listings, so ask your real estate agent for these details.
On a more personal level: Before shopping, define what value means to you by making a list of the features you want, like a two-car garage and mature trees.
3. How much house do you need? An interesting fact of American life is that as our average family size has gotten smaller, our houses have grown. The National Association of Home Builders (NAHB) reports that the average new home size in 1987 was 1,905 square feet. By 2001, it had increased to 2,324 square feet; to 2,469 by 2006; to 2,362 in 2009; and 2,679 in 2013. (See right-hand box.)
You should buy as much house as you need and can afford. But keep in mind that the larger the home, the more you will pay to insure, heat and cool it. Don’t forget to plan for the cost of repairs and maintenance, which, depending on the age and condition of the house and the harshness of your climate, could be one to three percent of its value per year.
Also, if you make less than a 20 percent down payment, you may be required by the lender to buy private mortgage insurance which is generally .5 percent of your mortgage payments for the year.
From the standpoint of lenders, one rule of thumb is that they want you to spend no more than 28 percent of your gross income for housing costs (including taxes and insurance) although there is some variation ranging from a low of 25 percent to a high of 33 percent.
Generally, lenders say that your other monthly debt payments should not consume more than about 36 percent of your income. Of course, only you know how much you need to contribute towards future life goals such as retirement and college education for your children.
4. What if a house has problems? Sellers are supposed to disclose any known problems. But even honest sellers may be unaware of latent flaws in their homes. That’s why it’s important to hire an independent home inspector who is working on your behalf. Ask friends and relatives if they know a good inspector, or visit the American Home Inspector website for a directory.
An inspector examines a home’s major systems — heating, cooling, electrical, and plumbing, as well as looks at the structure to make sure it is sound. That includes the foundation, roof, doors, windows, and the siding. The inspector also reports whether the lot is graded away from the house to allow drainage in the right direction. Depending on the home’s features, you may need a specialist to examine a pool, septic system, or private well.
In addition to a standard home inspection, your lender may require a pest inspection to ensure the home is free of termites and other damaging pests. Many buyers include the right to cancel their purchase agreement pending the results of the pest inspection.
The inspector should be able to tell you what repairs are necessary and what may soon need replacing, along with cost estimates. That allows you to decide if you can afford the house or not, and may serve as a bargaining chip when it comes to price.
5. Have you budgeted for closing costs? Once you find a house, don’t forget to set aside enough money for closing costs. These costs depend on your lender and where you live, but in general, they can amount to between two and six percent of your loan. Ask your lender for a Good Faith Estimate of the loan-related costs you’ll pay. Also, ask your real estate agent for a list of any other expenses.