Buying a home is a major financial decision. The National Association of Realtors reported that in November 2015, the median sales price of existing homes hit $220,300, or 6.3% higher than in the same month one year earlier.
As housing prices continue to climb, you need to make sure you're ready to make such a major investment. Here are five questions to ask to make sure that you are financially prepared for owning a home.
1. How Much Money Do You Spend and Earn Each Month?
Real estate professionals say that your total monthly housing expenses, including your estimated new mortgage payment, should never equal more than 28% of your gross monthly income. To know if you can afford your new home's mortgage payment, you'll have to first list what you're already spending each month on such items as car loans, student loans, groceries, and entertainment. (See also: 4 Easy Ways to Start Saving for a Down Payment on a Home)
"Do I really know my current income and all expenses?" asked Glenn Phillips, chief executive officer with Pelham, Alabama's Lake Homes Realty. "If you know this for each month, you'll have a realistic understanding of how much money is available for both the purchase and monthly expenses of owning a home."
Those monthly expenses are important, and can add up. And Phillips reminds homeowners that they'll need to budget money each month for additional expenses such as homeowners insurance, water, sewer, garbage pick-up, and of course, home maintenance.
2. How Handy Are You?
If you're handy enough to handle minor — or some major — home repairs and renovations on your own, you might be able to land a home in a desirable neighborhood for a cheaper price. Homes that need updates and renovations usually sell for less, which can be a positive for the handy homebuyer with a limited budget.
But be careful: Home renovations might cost more than you think. If you're not able to do at least some of these renovations on your own, you might end up paying far more to update your home than you planned.
"Should I buy a home that needs no remodeling and is ready to move in at a higher price, rather than buying the same size home — but one that needs updating at perhaps a lower price?" asked John Bodrozic, co-founder of digital home management site HomeZada. "If I buy a home that needs some remodeling, how many projects are desired, and what is a realistic budget and time frame to get these projects done?"
3. Can You Afford the Monthly Maintenance?
Having enough money to cover your mortgage, utility bills, property taxes, and homeowners insurance is one thing, but do you have enough dollars to cover the monthly upkeep involved with owning a home?
A lot can go wrong with a home — even a new one. Your water heater might burst. Your roof might start leaking. Even smaller projects like maintaining your yard and landscaping can drain your dollars. It's important that new homeowners have enough financial slush in their accounts to handle the monthly cost of keeping a home running, said Melanie McShane, a real estate broker with Arcadia, California's BrokerInTrust Real Estate.
"Buying a home is just the beginning," McShane said. "Once it is yours, you need to maintain and improve it. Replacing a roof or an AC unit are costly fixes. It is imperative that people have a small savings for the upkeep of the home."
4. How Strong Is Your Credit?
Your three-digit FICO credit score is an important number. Mortgage lenders will look at it to determine how likely you are to repay your mortgage loan. If your score is low — say under 640 — your lender will consider you a risk, and will charge you higher interest rates. If your score is in the excellent range — usually over 740 — your lenders will charge you far lower rates, making paying for a home more affordable.
Remember that a lower credit score can make the entire process of buying a home more costly.
"Your credit is extremely important," said Michelle Richards, a real estate agent with RE/MAX Gold Coast Realty in Hoboken, New Jersey. "The lower your credit score, the higher the down payment you'll need."
5. How Long Will You Live in Your Home?
If you don't plan on living in an area for at least five years, buying a home might not be a sound financial decision. Your home's value might not appreciate enough in such a short period of time to allow you to sell it for a high enough cost to cover your selling fees and make a profit, said Bill Golden, a real estate agent with RE/MAX Atlanta Cityside.
"Except in rare cases when you'd be buying into a rapidly appreciating market, or you're renovating a total fixer-upper, if you don't plan on staying more than a minimum of two to three years, it probably makes more sense for you to rent," Golden said. "If you know that your job is going to move you again in two years, buying a home might not be the best solution for you."
This article first appeared at Wise Bread.