My college professor once said you know when you’re an adult when you have a mortgage. His comment couldn’t be farther from the truth. Although, for many people, homeownership is a significant milestone in their life. Not knowing the right questions to ask when buying a house is financially unwise.
There are many factors to consider during the home buying process. After all, buying a home most likely will be the biggest purchase ever in your life.
Unfortunately, I wish I had thought more things when I purchased my first time home.
After signing all the closing documents for my first home, I recall the escrow agent shaking my hand, saying, “Congratulations. You’re in debt.” We all laughed together.
However, after owning six houses, three of them being flipped investment properties, I wish I would have done things very differently my first time around. So, learn from my mistakes, and be sure to ask these eight important questions when buying your first or next house.
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This question may seem to be the most obvious every potential homebuyer should ask. But, unfortunately, it’s not unheard of a person falling in with a house for sale without looking at their finances.
So, although they may have a huge and beautiful house, they may not have the money to support their other needs. This situation is often referred to as “house poor.”
Unless you have hundreds of thousands of dollars willing to spare, you most likely will be financing your home purchase. Therefore, one of the first steps a new home buyer should take is to speak with a mortgage lender and request a pre-approval letter.
The pre-approval letter will let you know how much a lender is willing to lend you. However, the amount on the letter shouldn’t dictate what you can buy.
Instead, it will let you know what you can’t buy. It’s one of the first steps you should take to filter out houses above what the bank is willing to lend.
Following the assumption you’ll be financing your house purchase, the mortgage payment is the monthly payment you’ll be making to the bank.
The mortgage payment consists of two parts: principal and interest. And, depending on how much you put towards a down payment, you may also be required to pay private mortgage insurance. As a result, you’ll spend most of your homeownership years paying interest versus paying down the principal.
Most online real estate marketplaces, such as Zillow and Realtor, offer a feature to calculate the monthly mortgage payment. All that is needed for you to provide along with the asking price is your planned down payment amount, the term (i.e., 20 years, 30 years), and interest rate.
As a general rule of thumb, the mortgage payment should not be more than 30% of your household income. So, for example, if your monthly net income is $1,500, then the mortgage payment should be no more than $450 ($1,500 x 0.30). But if you can get a house where your payment is under 30% you may be able to pay your mortgage off early.
Depending on where you live, this amount could either be small or sufficient. To make housing more affordable, you will need a way to increase your income or reduce your expenses.
Although the home’s purchase price may be attractive, it’s essential to account for property taxes because they vary from neighborhood to neighborhood.
For instance, I used to live in an older part of town. My property tax was around $2,000 a year. After a few years, my family and I moved into a newer house about 15 minutes away. My new property tax was about $6,000 a year.
So, don’t be caught off guard by doing your due diligence on the property. Expect a house in an appreciating area with a good school district to have higher property taxes than houses in the opposite condition.
Similarly, another expense to be mindful of is Homeowner Association dues or fees. The HOA requires homeowners to pay these fees towards specific amenities, such as snow removal or sharing the community pool in some neighborhoods.
Therefore, on top of paying property taxes, there might be HOA fees. And, while the city can raise your taxes, the HOA also can increase your fee too.
Aside from making a down payment on the house, there are closing costs to complete the real estate transaction between the buyer and seller. These closing include an origination fee, title search, title insurance, and appraisal fees.
Typically, closing costs are between 2% to 5% of a house’s purchase price. So, for a home for sale at $250,000, the closing costs would be at least $5,000 ($250,000 x 0.02). Thus, request your local real estate agent negotiate with the seller’s agent to split paying closing costs to reduce your expense.
Usually, people sell their homes to upgrade to a bigger house or downsize because they are empty nesters. Another reason is their employer is relocating them to another city for work.
However, the sellers also might be motivated to leave for unfavorable reasons. For instance, if your neighbors are loud college kids, it may be challenging to nurse your newborn to sleep. Other negative reasons could be foundation issues or overdue property taxes.
Therefore, be sure to do your diligence regardless of how beautiful the house is. Then, you could potentially avoid a headache making you regret making your purchase.
Also, if the house has been sitting on the market for some time, it can make you question if recent home buyers have discovered something odd that you haven’t yet. So, be sure to ask!
There is a charm with older homes. They are not typical cookie-cutter houses you find in new suburban areas.
Unfortunately, homes built decades old are not necessarily up to the house standards today. For example, there could be potentially hazardous threats in the house, such as lead paint or asbestos, that you would prefer to keep away from your family.
So, if you’re looking for a home with an old-school feel, be willing to spend some extra money on improvements and major renovations. Older houses may need renovation to improve energy efficiency and comfort. An energy assessment and today’s tax credits can help make this possible.
Buyers shouldn’t assume everything they see comes along with the house. Sellers stage their homes to help convince potential homebuyers to make an offer on their house.
For example, the homeowner can relocate large items to make their feel more spacious or rent furniture to make the house more appealing.
Thus, it’s essential to include whatever items you want to stay in when submitting your purchase offer. For instance, do you fancy their curtains made by their grandma? Add in your offer that you want to keep the curtains.
And, if you negotiated to keep the major appliances, ask the sellers if they are under warranty. This extra information will be helpful if something breaks in the future.
So, remember, the worst they can do is say no or counter you with another offer. Remember, it never hurts to ask.
Utilities are another expense homebuyers should account for. If you’ve lived in an apartment, the landlord may have included the utilities as part of your rent. So, it may come as a surprise when you see a bill you’re not used to paying.
This question goes along the line of, “How much can I afford?” Aside from paying for the mortgage, your net income also has to go towards utilities, such as water, gas, electricity, garbage, etc.
Also, a high utility bill can hint towards inefficient insulation and windows, which can be costly to upgrade. So, although you can meet the mortgage payment, pay property taxes every year, and have homeowner’s insurance, you’ll still need to budget for utilities. Take a look at how to reduce your home insurance costs.
If the sellers had any insurance claims filed, you should check if the homeowners did repair them.
For instance, the seller may have filed homeowner’s insurance claims for hail damage or other natural disasters on their roof. However, they also could have just kept the money and never moved forward with the repair.
This question also begs another question, “How old is the roof?” If the shingles have not been replaced over 20 years, that’s a cause for concern.
If the homeowners did any work, you should have a professional home inspector verify the owners did the work up to code. Some mortgage programs are very strict with their requirements. Thus, if something doesn’t meet their standards, the lender can deny your financing.
Additionally, if a city inspector identifies any illegal work or unsafe structure, they could require you to take it down, which will be another significant expense. So, as a precaution, add a home inspection contingency that will allow you to walk away from the deal if something is not satisfactory.
Every parent wants their children to receive a quality education. For this reason, some parents move their family to specific areas for their children to attend a good school district and extracurricular activities. So, if you’re looking to buy a home to grow your family tree and value education, consider what schools are in the area.
Final Thoughts on Here Are 8 Key Question to Ask When Buying a House
While you may haven’t found your dream home in this real estate market, there are a couple of things you can do in the meantime before you buy a house. First, you can use this time to save up for a downpayment and an emergency fund.
Also, you can work on paying down debt and improving your credit score.
Additionally, another good idea is to start practicing making mortgage payments. Finally, you’ll begin to build a habit of setting aside a portion for your other expenses and determine early on if you can afford a house.
This article by Jonathon Sanchez of the Parent Portfolio blog originally appeared on Wealth of Geeks and has been republished with permission.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.