Real Estate Advisor: October 2011
Things to Consider When Purchasing a Home
There are many issues to evaluate when considering a home purchase including what you can afford, what kind of loan best suits you, the property itself and once you find your dream house, how much you are willing to pay for it.
How Much Can You Afford?
Before starting your search for a home, you must decide how much you can afford. Generally speaking, it is recommended that the down payment be a minimum of 5-20% of the purchase price. In addition, there are two other standard thresholds to consider in terms of how much of your monthly income should be spent on housing.
- Your total housing costs (mortgage, interest, property taxes, insurance) should not exceed 28% of your income.
- The combination of your housing costs and all other monthly debt (car loans, student loans, etc.) should not exceed 36% of your income.
What Type of Loan Structure Works Best For You?
There are many different types of loans available. However, one of the basic decisions you'll have to make is whether you prefer the predictability of a conventional loan, knowing that your payment will be the same amount each month over the life of the loan, or whether you are comfortable with foregoing the fixed monthly payment for an adjustable loan where the initial interest rate is lower and the monthly payment amount will fluctuate periodically throughout the life of the loan. Both conventional and adjustable loans provide a variety of terms to select from to best meet your needs. A mortgage broker will be able to provide a wealth of information on the various options available as well as determine whether you qualify for any government-backed loan programs.
Where Do You Want to Live?
Once you have decided how much you can afford, then you must consider which areas to target for your property search that will both meet your budget constraints and are conducive to your lifestyle. Where do you wish to live: in the city with all of its hustle and bustle, in family-oriented suburbs, in the quiet countryside or perhaps in the mountains? Do you want to be close enough to walk, bike or ride the bus to your favorite destinations, or is a longer drive an acceptable cost to living further away from services? Are high quality school districts important to you either because you have children or for resale purposes? What degree of safety does an area need to possess? How close do you need to be to groceries, shopping, medical services and other amenities?
What Style of Housing Meets Your Needs?
Houses still have the greatest appeal and are a good option for individuals who want a place for the kids and/or animals to be able to run and play, for those who love to garden and create their own landscaping masterpiece, and for people who want a little elbow room between themselves and their neighbors. Houses come in all shapes and sizes: rambler, two-story, split level, modern, traditional, Victorian, Colonial, one room cabins, large mansions or estates. Newer homes located in housing developments will generally have a Homeowners' Association with wide-ranging dues/fees to cover community property expenses, bylaws and covenants, and enforcement practices; whereas, older homes or homes in more rural areas may or may not have any such associations.
Condominiums are frequently a good choice for individuals who prefer to live in an urban setting, people who travel extensively, and those who don't want the responsibility of maintaining a yard. Condominiums come in all sizes, ranging from apartment size to spaces that can exceed the size of an average house. Condominiums will most certainly have an association established to levy fees for building and grounds maintenance. When considering any condominium it is critical to review not only the by-laws and covenants prior to purchase, but also relevant financial documents to ensure that enough funds are in reserve to address future expenses and to prevent buying into an organization's mismanagement or poor planning.
Vacation properties and homes are often sought out in the mountains or near water access. While mountain locations provide easy access to outdoor activities such as skiing, snowmobiling, and snowshoeing in winter and hiking, biking in summer, homes near water provide for a wealth of summer activities involving swimming, boating, waterskiing and beachcombing. These properties can range from a parcel of unimproved land or a plot with a small cabin and just enough amenities to meet basic needs, to a large, fully modernized home suitable for year-round living.
Is This Your New Home Sweet Home?
Once you've found the perfect home, you'll want to try to assess how well the property has been maintained over time, carefully review all property disclosure documents and do a more thorough examination of the property for any hidden surprises. Hiring a home inspector who has extensive credentials is generally considered a wise move.
A home inspection should include a thorough review of:
- Structural elements: construction of walls, ceilings, floors, roof, foundations
- Exterior evaluation: elevation, drainage, driveways, fences, sidewalks, fascia, trim, doors, windows, lights, and exterior receptacles
- Roof/Attic: framing, ventilation, type of roof construction, flashing, and gutters
- Plumbing: identify pipe materials for potable, drain, waste and vent pipes as well as condition of toilets, showers, sinks, faucets, and traps
- Systems and components: water heaters, furnaces, air conditioning, duct work, chimney, fireplace and sprinklers
- Electrical: main panel, circuit breakers, types of wiring, grounding, exhaust fans, receptacles, ceiling fans and light fixtures
- Appliances: dishwasher, range/oven, built-in microwaves, garbage disposal and smoke detectors
- Garage: slab, wall, ceiling, vents, entry, firewall, garage door, openers, lights receptacles, exterior, windows and roof
You'll also want to know what isn't included in the home inspection. Some areas frequently not included in the inspection, or included only at a cursory level are:
- Radon, methane, radiation, formaldehyde
- Wood-destroying organisms
- Mold, mildew, fungi
- Rodent presence
Many home buyers have found talking to prospective neighbors quite enlightening. Not only can you learn more about the neighborhood and get a feel for who may be your future neighbors, but sometimes these interactions can provide valuable information including why the house is on the market, prior issues with the house (flooding/leaks, repeated pest infestations, illegal drug use/production) as well as general information about the neighborhood such as whether there are problems with vandalism and theft, high homeownership turnover, high level of rental properties, or local issues that may impact your interest (plans for a new road or shopping center, etc.).
Another frequently overlooked source of information may be your insurance company. For instance, if you are looking in an area that is prone to earthquakes or flooding, they should be able to tell you if the specific area has a higher than average level of claims which may impact your insurance premium and whether special insurance riders would be required for coverage. They may also be able to tell you if your premiums would be impacted by a higher incidence of claims due to theft and vandalism.
Factors to Consider When Preparing an Offer
Once you have decided you're interested in a specific home, the last step is figuring out how much to offer for it. There will be many factors to consider: your budget, how quickly you want/need to move, how quickly homes are selling, what similar homes in the area have been selling for, how long the house has been on the market, what repairs may be required and perhaps most importantly, how much you want this particular house.