Ask Chuck: Advice on Buying a House
To learn Biblical answers to your financial questions, you can #AskChuck @AskCrown your questions by clicking here. Questions used may be lightly edited for length or clarity.
Dear Chuck,
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My wife and I have been renting for five years and want to buy a home. Could you share any tips so we can make a wise decision?
Hopeful Homeowner
Dear Hopeful,
I commend you for seeking counsel in what's typically the largest purchase of a lifetime. Assuming you've compared the costs of renting vs. buying to consider the impact to your budget, that you have a sizeable down payment and money set aside for closing, maintenance and emergencies, you may be ready to get out of renting.
I just had a nephew go through a terrible experience with the purchase of his first home and it has motivated me to help others be fully informed about this decision.
Here is a list of important questions and details to help you decide if you're ready to buy a house.
Is This the Right Time?
If you plan to stay in your home more than three years then buying can be advantageous. This gives you some time to recapture your investment if the home appreciates in value. Be sure to consider the costs of repairs and updates on your new home. If you are stretching to make the purchase and will be broke when you move in then it's not the right time to buy.
You may have to show a two-year earnings history to get a loan if you're self-employed or on straight commission. Lenders don't like to see newly opened credit cards or recent debt, like car loans. And, moving money around 3 to 6 months before buying can negatively affect your credit profile. See if you qualify for any special grants or funding options.
In Proverbs 24:27 we're told, "Prepare your work outside; get everything ready for yourself in the field, and after that build your house."
Establishing steady income and preparing prior to home ownership gives you the freedom to focus time and attention to those occupying your house instead of sweating how to pay your mortgage. This is what makes it a home.
Buy Right
Shop with resale in mind. A convenient location near good schools, green space, and shopping are important.
Avoid the biggest or best house on the block. Values typically rise as much as your neighbors' homes, so the ugliest or smallest house has potential if it's surrounded by nice homes and you can afford some remodeling.
Are prices increasing in the area you are considering? Multiple "for sales" in the same area is a red flag. Run from proposed projects like highways, mining, or landfills! Avoid existing cell towers, train tracks or highways.
Study the neighborhood at different times of the day. Visit with people out walking or biking. Meet the neighbors and seek the pros and cons of living there.
Do your homework to avoid getting upside down on your home value as compared to your mortgage. A good realtor can be invaluable.
Count the Costs
There are many hidden, or unexpected, costs that come with buying a house. Do your research and don't be in a rush to buy a house if you can't adequately supply the cash for every fee.
Down payment: 20% minimum is ideal. Shop lenders for the best interest rates.
Private Mortgage Insurance (PMI): Protects the lender in case you default. Fees vary and are added to the monthly mortgage payment when 20% down payment is not made. Once you owe less than 78% of the purchase price, these payments can be dropped.
My advice: if you think you will need PMI, then you are not ready to buy a house.
Closing costs: Are 2-5% of the overall price of the home and include multiple fees. Sometimes sellers will negotiate and offer to pay all of, or a portion of, the closing costs. Get a total estimate. Several days before closing, the lender will provide a closing disclosure listing all costs. Study it carefully, checking for errors. Don't go to closing and get surprised!
Home Inspection fee: Goes to a reputable inspector to provide a detailed home inspection, documenting the status and condition of every part of the house. This usually costs several hundred dollars, but can save you thousands. Hire one with years of experience — I highly recommend that you (the Buyer) hire the inspector and not the Seller! Do your research before meeting with the inspector and ask as many questions as you need. They should send you a detailed report afterwards with pictures and an outline of everything they looked at, potential problems, and the current condition of every part of the house.
Repairs: If the inspection identifies problems, you and the Seller must decide who will pay for the repairs. A final walk-through should occur the day prior to closing. With furniture, paintings and rugs removed, check for cracks in walls and floors plus stains in flooring and any new water spots in the ceiling. A heavy storm prior to closing gives opportunity to look for tree damage and water pooling in the yard or around the house.
What stays: There's a possibility you and the Seller negotiated for a grill, curtains, a washer and dryer, etc. During the final walk-through, check to make sure anything in the contract is present in the house. Any light fixtures, mirrors, window treatments, or appliances the Seller plans to remove must be recorded in the contract.
Moving: Analyze your options of generous friends, truck rental or hiring a company. You can get moving boxes for free at many restaurants and stores that would otherwise throw them away. Don't be embarrassed to call and ask for them! Uhaul also offers used boxes at a discounted price. Be resourceful with your packing — towels and washcloths can replace packing paper around fragile items.
Remodeling and decorating: Budget adequately and exercise self-control. This is something that comes with time.
Ongoing Costs
Mortgage: Half a percentage point on your interest rate is worth thousands of dollars over the life of the mortgage. An escrow account may be established for monthly payments to cover taxes, insurance, and other annual fees.
Property taxes: Are tied to your home's value to pay for services like schools, fire and police. Costs vary depending on location with potential increases over the life of ownership.
Maintenance: Set aside a minimum of 1% of the home's value for yearly maintenance influenced by age, condition and location of the home.
Homeowners Association fees: Are based on amenities in your neighborhood. If your neighborhood has an HOA, know how much it'll cost you and when the fees are due. Check out any issues related to the HOA before buying.
Insurance: Is required with a mortgage and location dictates price. Flood-risk neighborhoods cost more and flood insurance is based on the elevation of the house. A security system, certain repairs or improvements, and location near good fire departments lower costs.
Title insurance: Protects you and the lender if someone later claims title and ownership of the house.
Laborers: Include fees like pest control, landscape and pool maintenance, snow blowing, etc.
Utilities: Electricity, natural gas, heating/cooling, water, and trash service vary by location. It is a good idea to ask the Seller for the past 12 months of billing statements for these items to help with your budget.
Commute: Costs may increase or decrease. Simulate a prime time driving scenario before signing the contract.
A Few Final Thoughts
Get a copy of the covenants for your new neighborhood and read thoroughly. Seek answers to anything you don't understand. If you ever want or need to rent out the home, make sure it's allowed. Some neighborhoods have strict rules about roofs, landscape, outbuildings, siding, exterior paint, window coverings, etc.
Understand the contract before signing. Take your time to read it through and ask questions. If the seller, broker or agent won't answer questions, walk away. Don't close unless tax liens, unpaid HOA dues, or other title defects are fixed.
Consider your future income, expenses, and family needs. Are you dependent on your spouse's income? Are you ready for the responsibility of home ownership?
This is an exciting time and I understand why you are hopeful! It is important to pray with your spouse and ask the Lord to lead you to the right decision together and remember: By wisdom a house is built, and by understanding it is established;by knowledge the rooms are filled with all precious and pleasant riches. (Proverbs 24:3-4)
For more practical help with your finances, download the Money Map. It's a step-by-step guide that will help you find financial freedom and reach your goals. In fact, buying a house is one of the steps! Download your copy for free here.
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