Before You Buy: Answer a Few Tough Questions

Is this the right time for me to buy a home? Owning a home, in short, rocks. The advantages include the chance to build equity, the tax deductibility of mortgage interest and nailing down your own little piece of the American dream. You don't have to find the perfect home or the perfect market conditions for it to be worth your while.

But it's not a decision to be made lightly, and here are a few reasons you might want to wait:

• If you don't have any savings. You need to have at least 3 percent to 5 percent of the purchase price of a home for the down payment, but ideally even more. Usually, the bigger your down payment, the better interest rate you can get, and at 20 percent, you don't have to suffer the insult of private mortgage insurance (PMI).
• If your job or home life is unstable. Not just for the obvious necessity of meeting the monthly mortgage payment; if you move to another city or get a divorce, having just sunk a chunk of change into closing costs, you may not recoup your investment even if you sell the house.
• If interest rates are too high. Not really a problem right now. Even with the unpredictable little dips and swells in mortgage rates of late, they're still at historic lows in the 6 percent range; homeowners paid eye-popping sums for their mortgages a generation ago, to the tune of 11.85 percent in 1985.

Is this a buyer's market or a seller's market? If homes in your city are sitting unsold and prices are leveling out, you're in a much better bargaining position than if you live in a hot market where houses are snapped up even before they're publicly listed for sale. Are you prepared financially and emotionally to get involved in a bidding war over the home of your dreams?

How much home can I afford? There are several rules of thumb about how much house to buy. One is that a home's asking price should be no more than 2.5 times your gross annual income. Another looks at your mortgage payment as a percentage of your gross monthly income: Don't exceed 28 percent. These numbers are intended as limits, not goals; if you buy a house that's a bit under your means, rather than right at the limit or above, you'll have more money to spend on things you enjoy.

How's my credit? The mortgage lender's office is not the place to find out scary news about your credit report. Check your credit scores with all three credit bureaus and get your FICO score before you apply for a mortgage loan to make sure there are no errors. Fix any errors that aren't your fault; if you have some blemishes on your record, like late payments, you may want to let some time pass with good credit behavior before seeking a home loan. Your credit scores have a real effect on the interest rate you'll be able to secure, which can make a difference of tens of thousands of your dollars in the long run.