4 Guidelines for Home Purchase (and How Far You Can Bend Them)

There aren’t many laws that apply to home purchases without exception. People from various socioeconomic backgrounds can now achieve this fundamental American ideal thanks to government programs. The day when only the wealthiest people of society could become landowners is long past.

So what are the guidelines for home ownership today? And how much do they relate to you?

1. Start saving for a 20% down payment.

To get the best mortgage rates, you must put down 20% of the purchase price. But for other Americans, accumulating that much money is an unattainable challenge. In fact, many prospective homeowners can afford a mortgage payment with ease – frequently at a level or below what they were paying in rent – long before they are able to build up that much cash.

This is an exception to the rule. For purchasers who meet all other requirements but only have enough cash on hand to cover a lesser down payment, FHA loans are an option. As little as 3.5 percent of the purchase price might be used as the down payment on an FHA loan. However, be aware that the loan’s interest rate will be greater than the rate on a loan with a loan-to-value ratio under 80%.

2. Establish an emergency fund.

Owning a home entails several unanticipated costs, many of them significant. Having money saved up for emergencies is simply a necessity. Your emergency fund should be sufficient to cover your living expenditures for six to twelve months, according to experts.

You can make a small exception to this guideline, but only if your financial situation is stable (steady income, adequate cash reserves, excellent credit score) at the time you begin looking for a home. Before moving, make sure you have at least three months’ worth of living expenses saved up, in addition to the funds needed to pay closing costs, the down payment, and any additional moving costs. The better, the more cash you have on hand.

3. Plan on staying in the house for at least five years.

This criterion is based on how long it typically takes to recoup the costs of purchasing a home (closing costs, moving expenses, and so on). Since the mortgage industry has become so competitive in recent years, numerous loans have been made available at extremely cheap rates (and in the case of refinances, even no-cost). Thus, some buyers will be able to breach the five-year rule considerably more quickly and sell without losing money.

If you suffer typical closing costs, you can employ a variety of tactics to shorten the time it takes until you reach your break-even threshold, such as purchasing a property at the low end of your price range and refinancing a bit sooner. (For the first few years, the majority of your mortgage payment is made up of interest, and the principal debt outstanding is reduced only very slowly each month. You might not be able to recoup your initial investment in the property if values are generally stable or even slightly decline.)

You can, of course, make plans to stay in the house for a longer period of time. Despite the housing bubble, real estate values typically increase by 3-5 percent annually over time.

4. Invest as much in a home as you can.

You will likely be urged to purchase the largest property you can afford by a lot of real estate agents and mortgage brokers. For everyone, that isn’t the best course of action. When you reach the upper limit of your budget, you have nowhere to turn if costs increase faster than you had planned.

If you are considering purchasing a more costly property with less than 20% down rather than a more modest home with a full 20% down payment, you should deviate from this rule. You’ll receive a significantly better financing deal, to start with. Another reason is that even with market swings, if you decide to sell your property in the near future, it is not likely to be worth less than what you owe.

When making your buying plans, keep the unforeseen factors in mind. Eventually, maintenance fees and property taxes will rise. When children are born, you could want to stop working, and if your job is making you miserable, you might wish to explore the world. If your financial obligations are heavy, you could have to significantly restrict these and many other experiences.

If you have your heart set on a house with specific renovations or luxuries, look for a house with space to expand and make plans to invest in those upgrades when you have the money.

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