From potential neighborhoods to mortgage options, the homebuying process involves a series of pivotal decisions. Before you begin an active real estate search, establish whether to look for a starter home or a forever home. Your best option depends largely on financial factors and lifestyle preferences.
1. Financial Health
While homeownership is a high-cost and long-term investment, it should not strain your finances. Evaluate your financial position to calculate what you can reasonably afford.
- Debt-to-income ratio: Your DTI ratio should be lower than 36% to ensure you do not overextend your debt obligations.
- Down payment: The more money you have for a down payment, the lower your monthly mortgage will be. If you put down less than 20%, you’ll need to get private mortgage insurance, which increases your monthly payment.
- Credit score: Another indicator of fiscal responsibility, a credit score of 620 or higher will qualify you for better mortgage interest rates, reducing your monthly payment.
- Emergency savings: Financial experts recommend building an emergency fund that covers three to six months of living expenses. This provides peace of mind in the event of job loss or unforeseen home repairs.
2. Current and Future Needs
Starter homes usually cover 1,500 square feet or less and have two to three modestly-sized bedrooms and one to two bathrooms. Forever homes tend to have larger rooms, more spacious yards, and a wider array of amenities.
Consider what you need not only now, but also in the future. If you have a family or plan to start one, a forever home gives you room to grow. For a single professional still forging a career path, a starter home with greater flexibility to relocate may make more sense.
3. Mortgage Options
Learn about different types of mortgage loans. Some offer discounted interest rates and more favorable terms for eligible parties. For example, prospective homebuyers with lower credit scores and a down payment of less than 20% may qualify for a Federal Housing Administration loan. Make sure to compare your options, rates, and terms by comparing mortgage companies.
4. Hidden Costs
The cost of owning a home extends far beyond the down payment and monthly mortgage. Additional home-related expenses include:
- Real estate tax: Depending on your location and the size of your home and property, real estate taxes can range from a few hundred dollars to tens of thousands of dollars.
- Homeowners insurance: Mortgage lenders require borrowers to obtain homeowners insurance as a loan condition. Standard policies typically cover interior and exterior damage, lost or stolen property, and personal liability.
- Utilities: Forever homes generally cost more to heat, cool, and power. However, a starter home with poor insulation or outdated systems can incur higher utility bills.
- Maintenance: All houses need regular upkeep to remain in good condition. In theory, starter homes should be easier and cheaper to maintain due to their smaller size. Some starters, though, are considered fixer-uppers and will require more money upfront for repairs and renovations.
- Home warranties: These optional plans offer supplemental protection for items not covered by homeowners insurance, such as appliances. Are you wondering whether a home warranty will pencil out? Before opting for a home warranty, review the
home inspection report to note potential issues. Also, check for existing warranties on appliances along with coverage details.
When preparing to buy a house, consider your current and anticipated needs and the financial resources available to you. You’ll also need to take into account possible costs for taxes, utilities, insurance, maintenance, and a home warranty. No matter what you choose, your new home should bring you joy and represent an exciting next chapter of your life.
Ready to purchase a new Indianapolis-area property? Work with an experienced agent from The Indy Property Source!
Image via Pexels