Finances & Making Sure You’re Ready to Buy a House

When I saw the article, 10 Questions To Ask Yourself Before Starting The Home Buying Process, I thought it would be fun to answer the questions as I just bought a house and I really wasn't ready. We'd just started researching where to move, and expected to take one to two years from start to moving, and yikes, we bought a house in under three months (haven't moved yet). So follow along as I answer these questions, and see if you're ready to buy a house.

Now it's true we're not novices when it comes to buying houses – this was our 14th house! What was new and scary was knowing we could go anywhere, as there weren't any job or school dependencies to guide our choices. 

10 Questions to Learn if You're Ready to Buy a House

There's a lot of information here, so we've split things up into 2 articles:

• Here we review the questions (3) related to finances and legal, in Finances & Making Sure You're Ready to Buy a House.
• Then we walk through the more emotional questions (7) related to home ownership, from location to how your new house will fit into your life goals. This article is titled Balancing the Key Home Decision Factors – Where, What & Why.

Will Your Finances Hold Up to Scrutiny?

Your lender will ask for a lot (read a LOT!) of financial paperwork. To be fair, they're simply asking for documentation to prove you can afford to buy the house you want, with minimum risk that you'll repay the debt you're taking on to finance the purchase. 

With the changes in mortgage lending, it now makes more sense to line up your finances before looking for a home, to make sure you know how much house you can afford. That means you want to get pre-approved (all paperwork submitted and reviewed), not pre-qualified which is based on your credit history. So here's what pre-approval and the complete application look for:

• Adequate savings to make the down payment, with money left for closing costs like a home inspection. Ideally you'll want to put 20% and be prepared to provide an audit trail showing exactly where the money came from. Our challenge was deciding which retirement savings to tap, as we bought our new house before selling our existing home.
• Stable income so you can comfortably make the monthly payment, which covers the mortgage, property taxes and insurance. This is where owning a business makes financing a home tricky, as legitimate business expenses you can deduct to reduce taxes, will reduce the income used to qualify for a loan (learn more with this article, One Thing Your Accountant Won't Tell You).
• Strong financial management demonstrated by your credit reports, and a reasonable amount of debt for your financial situation. This is where your debt-to-income ratios are important to understand, as lenders typically look for 28% front-end (mortgage, taxes and insurance) and back-end (front-end plus all other debt).

How Much Are You Willing to Pay Each Month?

This is a really big decision, as it will determine how much house you buy. Many home buyers are tempted to spend what they can borrow but that can also leave you feeling house poor. You might want to max out your borrowing capability if you're young, with a lot of potential to grow your income over the next few years. The recent turmoil in housing though, would tell you to be cautious and conservative when you buy a house!

We're starting to reshape our lives in preparation for retirement. We didn't want to pay cash for our new house, but also didn't want to commit to more than we could pay comfortably, especially with two mortgages. We know we want to make improvements to the new house. And we're not selling our existing home right away, so there's some risk if we can't find a renter right away and have to carry two mortgage payments. 

The best way determine how much house you can afford, is to project your new budget as a homeowner. Here are some articles to help you make the best decision for your situation, as every situation is unique.

• True Cost of Home Ownership will help you identify all homeowner costs, as there are more expenses than the monthly mortgage payment.
• Invest in Your Home for Retirement Savings will explain how part of your mortgage is like forced retirement savings. For maximum flexibility I prefer 30 year loans, and add more principal to each monthly payment to pay off the mortgage in 20 years. For now, I cancelled the extra payment while paying two mortgages. 

Whose Names Will Go On The Deed?

At first I didn't think this question was important enough to be listed here. For years our only concern was who's name was first on the title, mine or my husband – we've alternated to be fair. Now it's clear that depending on who's paying the mortgage, it's important to deal with the emotions this question can raise, early in the process when you buy a house. Here are just a few of the unusual situations to be dealt with – a parent co-signing to support a larger loan amount, a partner who is self-employed or a reason to protect one partner's assets in case of a lawsuit. In fact our title is more of a place holder, as we expect to move the house into a trust once we've done some more retirement planning … as we thought we had another one to 2 years.

Most often the decision is between tenancy in common and joint tenancy with right of survivorship. We've always used the later because it makes the transfer on death easier. Arizona is a community property state so we went with community property with right of survivorship, as there are preferential tax provisions. Here's a table that my title company, First American Title, provided, that does a nice job of explaining the 4 title options in Arizona.