So, you are sitting down at your kitchen table enjoying your coffee and toast, and you take a good look at your surroundings. You’ve done well making your first house into a home for you and your family, but you feel like you need a change. Whether out of necessity due to outgrowing it or just out of the desire for something new and different, the first thing you need to consider before looking for a new house is if you are financially ready. You’ll need money to get your current home into market shape, credit to be approved for your next home and enough money to handle any surprises along the way.
Getting your Home Ready to Sell
Take a walk around your house, and look closely at every seam and surface. No home that has been lived in for years is perfect. Are you willing to try and sell it as is for a lower price? Or do you want to maximize the return on your investment and make your home more appealing to buyers? If you answered the former, you might not be financially ready to sell. If you answered the latter, you need to work with a realtor to get an inspection and take a look at the renovations that are most needed and necessary to a potential buyer. Getting your home into selling shape and taking care of big issues helps the selling process go much smoother. Purchasing a resale home is an exciting, yet intimidating transaction for some buyers, and a negative inspection can cause the sale to go south quickly. If you are financially ready and take care of your home’s issues early, you can avoid having your home fall out of escrow due to a spooked buyer.
Checking your Credit Score
Unless you have a place for your entire family to stay for an indefinite period between homes, you’ll likely take out a loan for a new home to move into right away. Those buying homes with cash last year leapt up to 43% of home buyers, but most of those were baby boomers downsizing, foreign investors and home flippers. So, most of us need to approach a lender and this is where your credit score comes into play. Check your score! Most applicants for FHA loans need a minimum FICO score of 580 to be approved for the lowest down payment, which is at 3.5%. If you credit score is lower, you could be looking at a down payment more than double that amount. Make sure to check out your credit report and determine if you have the down payment amount you may need for the loan. If you don’t, you may want to postpone and work on clearing up some of the blemishes on your report. Remember, if you are a two-income, middle class family with 1-2 children, your monthly mortgage payment should never exceed 28-35% of your gross monthly income. Those without children or those in higher income brackets can afford a larger percentage.
Having Money for the Move
We discussed down payment, inspections and renovations, but the costs of selling a home and moving into another are many more. Your real estate agent will have fees. There are closing costs. And of course the numerous costs of moving possibly decades of furniture, artwork, and personal items from one place to another – movers, boxes, bubble wrap, storage units, etc. Another thing to consider are the costs associated with the new area you wish to move to. Will your commute be longer? Are utility bills higher? Are there any HOA fees? Are there new or higher insurance policies you’ll need to take out? If you begin tallying these costs up with a calculator and realize they are too high, this may not be the right time financially for a move .
Of course, if your home has negative equity, you’ll probably want to wait the market out a little longer. But if you are comfortable with your home’s current equity, just think about the factors above first to determine if you are truly ready for a large financial transaction like selling your first home. If everything seems reasonable and affordable, there is nothing holding you back from the exciting change you are seeking!