Reader Q&A: Josh from Cincinnati wanted to know if now is a good time to buy a home. Here’s an expanded version of my response to him.
It will be one of the biggest questions among home buyers in 2011. Is this a good time to buy a house? It’s certainly a valid question to ask. After all, a lot has happened in the housing market over the last few years. We’ve seen lenders fail, mortgage products disappear, and lending standards tighten. That’s not to mention the robo-signing scandal, the government seizure of Freddie Mac and Fannie Mae, or the new rules imposed by federal regulators.
It’s a different mortgage market today than we’ve had in the past — and it’s still evolving. This is what creates such confusion and uncertainty among home buyers. First-time buyers in particular have a lot of questions about the process. But in this article, I’ll focus on Josh’s question: Is now a good time to buy a house?
When it Might Make Sense to Buy
The image above gives you a general idea of when it makes sense to buy a home. You’re in a stable real estate market. You’ve saved enough money for your down payment and closing costs. Mortgage rates are affordable. If you have all three of these things in your favor, then it might be a good time to buy a house. But these are just the financial factors. There are certain lifestyle and emotional considerations as well.
In order to figure out the best time to buy, you need to ask yourself a series of questions. Below, I’ve created a checklist to help with this task.
Checklist: A Good Time to Buy
Is this a good time to buy a house? Answer the six questions below, and you’ll have a pretty good idea.
- Will owning a home improve or hinder your lifestyle? Home ownership is not right for everyone. People who move around a lot are usually better off renting. The same goes for people who don’t handle financial responsibility well (you know who you are). Don’t listen to the lenders and home builders who tell you home ownership is the American dream. This is just marketing nonsense. Before you take on the responsibility of owning a home, you need to make sure it’s your dream.
- Are home prices stabilizing or rising in your area? In 2011, a handful of housing markets will see some appreciation. But most markets will either see flat prices or continued depreciation. This is the majority consensus among economic analysts. If prices are stabilizing or starting to rise in your area (and you’ve answered the other questions on this list), then it might be a good time to buy a house. On the contrary, if home prices are still falling in your area, you should probably take a wait-and-see approach. It’s rarely a good idea to buy a home in a declining market.
- Have you checked your credit score lately? If you’re using a mortgage to pay for the house, your FICO credit score will come into the picture. Lenders will use your credit score to determine two things: (1) whether or not you qualify for a mortgage, and (2) what kind of interest rate you’ll get. So instead of asking if this is a good time to buy a house, maybe you should be asking a different question: “Can I even qualify for a mortgage loan?” If you check your credit and find out you have a score of 500, the rest of this article is moot. You won’t qualify for a home loan. If your score is in the mid-600 range or higher, you’re probably in good shape. Learn more about credit scores.
- Do you have a home-buying budget? A lot of first-time home buyers skip the budgeting process altogether. “Why should I bother? The lender will do this for me.” Wrong. The lender will not establish a budget for you. It’s not their job to do this. The only thing they can tell you is how much of a loan they’re willing to give you. You should have a budget in mind before talking to a mortgage lender. And you should stay within your budget, no matter what the lender offers you. In other words, don’t take on a mortgage loan that’s going to squash your quality of life. Learn more about budgets.
- Have you saved for a down payment? If you qualify for a VA or USDA home loan, you might be able to avoid the down payment. All other borrowers will have to make a down payment of some kind. The days of zero-down mortgages are gone for now. For an FHA loan, you could pay as little 3.5% down. For a conventional mortgage (one that’s not government-insured), you’ll probably need to make a down payment of at least 5% — maybe even 10%. If you have plenty of money saved for a down payment, then it might be a good time to buy a house.
- Can you afford the closing costs? The down payment is just one of your home-buying expenses. You’ll also have to pay a variety of mortgage-related fees. These are collectively referred to as closing costs. You’ll have to pay these expenses during the closing process. So it’s another thing you have to save up for, just like the down payment. Average closing costs range from $3,000 to $6,000, though they could exceed this amount.
- Will mortgage fees increase in the future? This isn’t really something you can answer, without the benefit of a crystal ball. But I want to put it on your radar. There is some talk about getting rid of Freddie Mac and Fannie Mae, the two organizations that buy mortgages from lenders. If this happens, we will likely see higher mortgage fees in the future, and even tougher lending standards than what we have today. This is why so many people are saying now is a good time to buy a home. We’re just not sure what the mortgage market will look like a few years down the road.
Is now a good time to buy a house? Answer the questions listed above, and you’ll know if it’s time. If you’ve got your finances together, and your local real estate market is stable, then 2011 might be a good time to move forward. But there’s no rush. Don’t get swept up in the home-buying mania. Forget about home ownership being the “American dream.” It needs to be your dream. Do the math and ask the tough questions. Proceed when ready.
Related article: Top 10 Signs You’re Ready to Buy
Where to Learn More
This website offers thousands of articles on the home-buying process. If you would like to learn more about any of the topics discussed in this article, you can use the search tool at the top of this page. It will give you access to a vast library of information. You might want to check out our list of home buyer FAQs as well.
Remember, you are the only person who can decide if this is a good time to buy a house. You’re the one who will be held responsible for the mortgage payments. No one else can make this decision for you. Local market conditions may apply to all home buyers, but there are plenty of personal considerations as well. You need to take all of these factors into account before entering the market.