A recent segment on NBC’s TODAY Show revealed that NOW is the best time to buy a new home. Not only are prices at an all-time low in many cities, including New York, Chicago, Miami and Atlanta, but most mortgage rates are less than 6 percent (historically, mortgage rates are between seven and 17 percent), said Barbara Corcoran, real estate mogul, and Carmen Wong Ulrich, host of CNBC’s “On the Money.” With higher unemployment rates and more foreclosures, buying a home is more affordable than it’s been in years. But before you buy, you should ask yourself these important questions:
Can you put at least 20 percent down?
If you’re unable to make a down payment of at least 20 percent of the value of your home, you should reconsider whether now is the best time for you to buy. Paying off 20 percent of your home’s value up front will bring you more equity in your home from the first day you move in. Not only that, but the more you’re able to pay upfront, the better interest rate you will receive, as you will be considered less of a risk to lenders. If that’s not enough, you’ll also decrease the amount of money you have to borrow, which will in turn decrease your monthly payments. It’s a win-win…win.
Do you have ample cash savings?
Ulrich suggests that you have at least six months of home loan payments saved up before you purchase a new home. She considers this the capacity to pay for your home after your initial down payment. The second part of this capacity is a steady income.
[Mortgage Help: Get your free credit report and see if your credit score is mortgage qualified]Do you have a stable income?
Without a steady income, staying on top of your monthly mortgage payments will be extremely difficult and it’s so important that you don’t fall behind on your home loan. Manisha Thakor, coauthor of the books On My Own Two Feet, recommends that you keep your total housing-related costs (mortgage, insurance, property tax, upkeep, utilities, etc.) at or below one-third of your income. Any more than that, and it will become to difficult to pay off every month.
Do you have a good credit score?
Before you buy a home, make sure you have a very good credit score. You’ll want to check your credit report to ensure accuracy a few months before you’re ready to buy and start actively doing things to improve your credit score, if necessary. The better your credit score, the lower your interest rate and monthly payments. In fact, according to Consumer Reports, “Over the life of [a $150,000] loan, the people with the best credit scores may pay roughly $138,000 less than those with the worst.” A low credit score can also keep you from getting a loan.
Borrowers with scores above 760 will receive the lowest interest rates, according to Bankrate.com. Scores below that usually receive incrementally higher interest rates and may be offered a smaller variety of loans. In any case, you need a score of at least 620 to even qualify for a mortgage.
Do you plan to stay in the house for at least 5 years?
If you think you’ll move in less than five years, you want to be as sure as you can that you’re buying into a strong housing market, according to Thakor. Buying and selling a home come with costs, including closing costs, concessions and real estate fees. By holding off on buying until you know you’ll be in the home for five or more years, you’re improving your chances that your home will appreciate enough to offset the costs so you don’t end up under water.
While buying a home can be a great investment, it’s not for everybody. Make sure you’re in the right place financially before taking such a great leap.