15 Questions to Ask Before Buying a House - Part 1
Editor's Note: This is part one of a two-part series. At the end of this article, you'll find a link to the second part of the lesson.
How much house can I afford? Which type of mortgage loan is right for me? Is now a good time to buy a home? What are home prices doing right now? These are some of the questions you need to ask before buying a house. But they're not the only questions. In this two-part series, I'll address 15 of the most important questions to ask when buying a home.
1. Is this a good time to buy a home?
This is one of the most common questions we receive from readers every week. In fact, I'd put it in the top three. Many of the topics addressed in this article will help you answer this question. For now, let me sum it all up with a diagram.
The image below shows three overlapping circles. These circles represent mortgage affordability, housing stability, and the amount of money you've saved. If you have all three of these factors going for you, it might be a good time to buy a house.
Learn more: Is now a good time to buy a house?
We will talk about these three circles in more detail, as we progress through the article. But first, another question to ask when buying a home...
2. Does it make sense for you to buy a house right now?
You've probably heard that homeownership is the "American dream." This slogan was created by home builders and mortgage lenders years ago. But it certainly doesn't apply to everyone. Homeownership can be a dream for some but a nightmare for others.
So before buying a house, you need to ask some serious questions about your lifestyle and priorities.
- Do you like to move around every few years, or would you rather plant roots and stay in one place?
- How well have you managed your debts in the past?
- Are you ready to take on the long-term financial obligation that comes with a mortgage loan?
- Will homeownership improve your lifestyle, or take away from it?
- Have you saved up enough money for your down payment, closing costs and other housing expenses?
These are important questions you must answer before buying a house. If you neglect this soul-searching process, you may find that owning a home is more of a burden than a blessing.
3. How stable is your employment / income situation?
There are some obvious differences between renting and owning a home. One of the biggest differences is what happens when you fail to make your payments. If you fall behind in your rent, your landlord can kick you out. But if you fall behind on your mortgage payments, the lender can foreclose on the home. A foreclosure does serious damage to your credit score that can last for years.
This is why it's important to have stable employment and income when buying a house. The question you need to ask is: What will happen if I lose my job or a portion of my income? This is especially important for single-income borrowers, since they are more vulnerable than double-income families.
No one can predict the future. But you at least need to consider the possibility of income loss. If you lost your current job, how long do you think it would take to find another? How long have you been in your current position? How strong is the company you work for? How much job stability do you have right now? These are all questions you need to ask before buying a home.
4. How much house can I afford to buy?
I've written a lengthy article on this topic already. But this is one of the most important questions to ask before you buy a house. So it at least needs to be mentioned here.
The important thing to realize is that a mortgage lender cannot determine your financial comfort-zone. They don't know what your future plans are, and how those plans relate to your finances. They're just trying to sell you a mortgage loan.
You need to establish a comfort zone for yourself. You would do this by examining your monthly net income, in relation to your monthly expenses. You want to make sure you have enough money left over each month (after paying your mortgage) for all of your other expenses. You also want some money left over for your lifestyle and entertainment costs. After all, what's the point of buying a house if you have to sacrifice all the things you enjoy?
Learn how to create a housing budget here.
5. How much debt do you have? What's your debt-to-income ratio?
When you apply for a mortgage loan, the lender is going to examine a number of things relating to your finances. One of the things they will look at is your debt-to-income ratio, or DTI. This is simply a comparison between the amount of money you make each month, and the amount you spend on your existing debt obligations.
For example, if you only spend about a quarter of your income on your debts, then your debt-to-income ratio is 25%. This is considered a very good DTI by most lenders. But once you get above the 35% mark, you start to run into problems.
The bottom line is this. If you have too much debt in relation to your income, you won't get approved for a mortgage loan. And if you do get approved with a high amount of debt, it will greatly reduce your buying power. You'll probably pay a higher interest rate as well. This is another one of the questions you should ask before buying a house. How much of my income to I currently spend on debts?
6. What's your FICO credit score?
At the height of the housing boom, it really didn't matter what your credit score was. Back then, you could've qualified for mortgage loan even with a score in the 400s. Those were the days of subprime lending and stated-income mortgages. Those days are gone.
Today, your credit score can make or break your chances of getting approved for a loan. A low score could derail the process, even if you are financially strong in other areas.
I recommend that you check your credit scores at least a month before applying for a loan. That way, you won't be surprised by the lender's response. And if it turns out that your score is on the low side, you'll have some time to improve it.
This is clearly an important question to ask before buying a house. But there are some follow-up questions that go along with it:
- You want to know your FICO credit score, for one thing. We talked about that. You also want to know what score you'll need to qualify for a home loan. Here's an article that discusses that topic.
- If your score is lower than the lender's minimum cutoff, you'll want to know how to improve it. Here's an article that offers tips for boosting your FICO score.
7. Does your credit report contain any mistakes?
We just talked about the importance of your credit scores when buying a house. Your FICO score is a number between 300 and 850. But the number is based on information contained within your credit reports. You actually have three reports -- one for each of the reporting companies: Experian, TransUnion and Equifax.
If you have a lot of positive information in your reports (paying your bills on time, no bankruptcies or debt collections, etc.), then you should have a pretty good credit score. But if you have a lot of negative information in your report, you will have a lower score.
Believe it or not, it's fairly common to find mistakes in your credit reports. It might be something harmless like an erroneous street address. Or it could be something more harmful like a debt collection that's not yours.
The credit-scoring system doesn't care if the information is accurate or not. It simply converts the information into a FICO credit score. It's your job to review the information in your reports to make sure there are no mistakes. You can learn more about that on this page.
8. What kind of house are you looking for?
This is obviously an important question to ask before buying a house. And you need to be specific here. I recommend making a detailed list of things you need in a house. This list should include the following:
- The minimum square footage that is acceptable to you
- Whether you prefer a one-story or a two-story home
- The architectural style you prefer
- The required number of bedrooms and bathrooms
- Location of the master bedroom (upstairs or down)
- Size and layout of the kitchen
- Quality of appliances in the kitchen
- Size of the yard or lot
- Availability and type of heating / cooling
- Public water vs. well water
- Public sewer vs. septic tank
This kind of list will help you in two ways. First, it will force you to identify your priorities. You can even divide the list into two columns for "needs" versus "wants."
This process will also make your real estate agent's job easier. These days, agents don't sit in front of the computer and scour hundreds of listings to find your ideal house. They simply plug your desired features into a database to generate a list automatically. So your agent needs to know exactly what you're looking for. And so do you.
9. Where do you want to live?
This might seem like an obvious consideration. But you'd be surprised at the number of home buyers who don't research the area where they buy. I refer to this as target fixation. The buyers are so in love with the house that they don't even consider the neighborhood where it's located. And then, weeks or months later, they realize they're not very fond of the area where they live. It happens all the time.
You obviously want to ask some questions about the house you are buying. But you also need to research the neighborhood and surrounding area.
- What's the demographic makeup? Is the neighborhood comprised of younger families, retirees, or college kids? You want to choose a neighborhood that is compatible to your current lifestyle.
- And what about the crime rate in the area? You can get access to this information online, usually through the local police departments website.
- What about access to shopping, distance to work and school, etc.?
You need to ask questions about all of these things before settling on a particular area.
Continued: You can continue reading part two here.