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7 questions every homebuyer should ask

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Whether it’s a starter home or your dream home, here’s how to determine whether buying is your best move right now.

Real estate is an American obsession — just look at the number of TV shows, Pinterest boards and websites dedicated to finding, renovating and decorating the perfect home. As a signifier of “the American dream,” homeownership still looms large. And although real estate prices have lately been soaring, the desire to own a home has stayed strong. In fact, according to Bank of America’s 2022 Homebuyer Insights report, 54% of perspective homebuyers say saving for a down payment to buy a home is a financial priority. And many homebuyers are getting more creative in the ways they’re saving, with 56% stating that they would consider getting a second job.

There’s a lot to consider about homeownership. Are you a renter with a desire to purchase your first home? Or an existing homeowner considering buying a second residence? Whether you’re pursuing your first, second or third property, the decision to purchase a home is a big one. To help you think through whether it’s the right decision for you, we turned to Merrill Lynch Wealth Management Advisor Neil Stikeleather. Here, he shares seven questions that he asks potential homebuyers and offers up some thoughts on the issues you should consider as you answer each one.

1. Is owning the roof over your head your No. 1 priority?

“Your answer is going to depend on the other things you’ve got going on in your life. Are you socking away funds for a wedding or graduate school? Have you started saving for retirement or are you planning to begin soon? Buying a home should mesh with the rest of your priorities. Having other financial goals doesn’t necessarily prevent you from buying a home, but it could help narrow your price range or lead you to consider postponing the purchase for a few years.”

“Buying a home should mesh with the rest of your priorities. Having other financial goals doesn’t necessarily prevent you from buying a home, but it could help narrow your price range or lead you to consider postponing the purchase for a few years.”

–Neil Stikeleather, Merrill Lynch Wealth Management Advisor

2. Do you expect any big changes in your life in the next few years?

“Could your career make it necessary for you to move? Are you thinking about starting a family? If you’ve got major short-term plans, you might think twice about buying now. In most cases, you should stay in a home for at least five years to recoup your up-front costs.”

3. Will you qualify for a mortgage?

“For many homebuyers, sitting down with a bank representative to discuss mortgage options is the moment of truth. Before you get to that point, I advise taking a few minutes to calculate your debt-to-income ratio. That figure compares the amount of debt you have against your overall income. Banks often use it to assess your ability to handle a mortgage. Generally, to qualify for a mortgage, monthly payments on your debts should come to no more than 43% of your monthly income. It might also be wise to go through the loan prequalification process at your bank. It’s a relatively easy way to find out whether you’ll qualify for a loan and, if so, how much you can afford.”

4. How’s your credit?

“Your credit score factors heavily into your ability to get the best interest rate available. Before you apply for a mortgage, take advantage of your right to a free credit report from each of the three nationwide credit reporting companies to find out where you stand. (You can see all three reports at AnnualCreditReport.com.) Request corrections right away for any inaccuracies you find—updates can take time.”

5. Have you saved enough for your down payment?

“The traditional practice is to put down at least 20% of the purchase price of a home in cash. There are, however, many exceptions to this rule. In some cases, you can provide investment assets as collateral to help reduce your down payment. There are also a number of mortgage programs available today — VA, FHA, etc. — that require little or no down payment.”

“It’s important that you’re comfortable with the monthly mortgage payment, which will include the principal on the loan, plus interest, as well as the amount put aside monthly to cover real estate taxes and insurance. It’s also important to have sufficient emergency savings set aside so that you could comfortably make the mortgage payments for several months in the event your income was suddenly reduced.”

“It’s important that you’re comfortable with the monthly mortgage payment, which will include the principal on the loan, plus interest, as well as the amount put aside monthly to cover real estate taxes and insurance.”

–Neil Stikeleather, Merrill Lynch Wealth Management Advisor

6. Are you aware of all the expenses of being a homeowner?

“Costs like heating and insurance are often higher for homeowners. You may also have to pay for things you currently get for free, such as waste removal and lawn care. And when the hot water heater breaks or a storm damages your roof in the middle of the night, you won’t be able to simply call your landlord. Because home expenses vary widely by region — a heating bill in Maine looks very different from one in Virginia — your best bet is to talk to either a real estate broker or homeowners in the area where you hope to live, just to get a sense of what you are in for.”

7. Might it make sense for you to continue renting just a while longer?

“Don’t feel pressured by the conventional wisdom that now is a good time to buy before prices and interest rates climb higher. That way of thinking makes more sense for someone who is investing in real estate. You don’t want to get caught up in the noise around real estate when you’re making a decision about your family and your future.”

“Look at your take-home pay and living costs — and how those numbers will change when you move into a home. The point here isn’t to discourage anyone. But homeownership is a big life decision, and you need to be fully aware of the commitment it requires before you sign on the dotted line.”

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