When is the right time to buy a house? How much house can I afford? Is it a good investment? A terrible investment? Will society judge me if I don't own a house by 35 or 40? Do I need 500 or 5000 square feet?! Why is this so overwhelming?
Stop. Take a breath. Let's talk about why or why you should not purchase a house.
Buying a house is one of the biggest decisions we make as adults. Before you decide to purchase a home you need to ask yourself all of the questions above, plus many others. Take your time asking and answering these questions. It's easy to get overwhelmed and let societal/family/friend pressure influence your major life decisions. This is a choice that should not be taken lightly.
So should you buy a house? Well, it all depends. Here are a few things to consider thoroughly:
How long do you plan to live there?
For most, buying a house only makes sense if you plan to live there more than five years. If there's a solid chance you'll move, then you better buy something that'll be easy to rent out or don't buy at all. Houses are not good short-term investments. If you do want to flip houses, you really need to have a high level of expertise and knowledge in this area. Sometimes I have to remind people they are not Nicole Curtis or the Gaines family. You do not have an HGTV show, nor does watching the DIY Network make you an expert!
How much debt do you currently have?
What's your debt-to-income ratio? This is something you need to figure out. Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. The higher the ratio, the more likely you'll have trouble making all your payments on time. Mortgage lenders like to look at this ratio as well. If your debt ratio is higher than 43% you probably won't get a qualified mortgage.
Shoot to keep your debt-to-income ratio under 36%. Ideally, you'll want to get it down lower than 20%, but I understand that's nearly impossible for most Millennials.
Have you saved enough?
I generally recommend a down payment of 20% of the house purchase price. This means if your house costs $200,000 you should be able to put down $40,000. This number is recommended because it'll help you save money in the long run by avoiding private/primary mortgage insurance. If you put down less than 20%, you'll likely have to buy PMI. This insurance protects the lender incase you can't afford the house payments and go into foreclosure. So in addition to paying your principal, interest, taxes, and insurance, you'll also pay PMI. Once you reach 20% equity in the house, you can say goodbye to PMI payments. By using the 20% down payment rule, you'll save yourself thousands.
If you don't have enough saved for a down payment, turn it into a SMART goal (surprise, surprise I wrote about setting SMART goals in my book).
What are the reasons you feel now is the time to buy?
Far too often I find people wanting buy homes for all the wrong reasons. They feel societal pressure due to their age. They believe because they are married it's the next logical step. They've been told it's a good investment. STOP THIS MADNESS.
What's good for one person or couple may not necessarily be right for you. Evaluate deeply your reasons for wanting to purchase a house. Is this the area you want to live in for at least 5 years? Are you going to have a family here and/or is this the place you want to put down some roots? Is your job stable? Can I expect the value of homes to increase in this area? DO I EVEN LIKE LIVING HERE!?! You'd be surprised at how often people buy homes in places they hate.
What's the housing market like in your area?
Location, location, location! Where you buy a house will determine whether it's a good or bad investment. Sometimes it's difficult to know what the local economy will look like in 10 or 20 years, but you really need to do your homework before buying. Look at employment rates, school systems, whether businesses are coming or going. Does this area look like it's on an upswing or downswing?
Finally, don't rush. If you have to continue renting, so be it. Sometimes, that's just the better option. Houses are liabilities. They are also massive responsibilities. If owning a home is not for you, THAT IS OKAY.
Oh and one more thing...if you suck at cooking as much as I do...check out Blue Apron. They're freaking awesome...