Quiz: Are you financially ready to buy a new home?

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2 min
Quiz: Are you financially ready to buy a new home?
Image: Cultura RM Exclusive/Leon Sosra/Getty Images

About This Quiz

Even if now's the right time in your life to own a home doesn't necessarily mean your finances are also up to the commitment. Test your fiscal fitness in our "Are You Ready to Buy a New Home" quiz and save yourself the hassle of a financial crisis.
What is the recommended percentage of income you should spend on a monthly mortgage payment?
40 to 45 percent
20 to 35 percent
15 to 25 percent
Correct Answer
Wrong Answer

While 15 to 25 percent might be in the ideal range, 20 to 35 percent is a general recommendation.

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How much of a down payment is recommended and/or required when purchasing a home?
20 percent
80 percent
30 percent
Correct Answer
Wrong Answer

Although it isn't a national requirement in the United States yet, in 2011 the government proposed a 20 percent minimum down payment for future home buyers, which is in line with what most people recommend and most lenders request.

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Which type of loan fluctuates with the rise and fall of interest rates?
market
maturing
variable
Correct Answer
Wrong Answer

Variable loans fluctuate with the federal interest rate, and though they can provide initial savings at the front-end or if you're planning to turn over a property in the short term, variable loans are risky because they can increase over time with little recourse but to pay the higher rate.

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If you don't have a down payment, you can still buy a house by taking which step?
financing the down payment with a separate loan
extending the 30-year mortgage term
paying extra toward principal each month
Correct Answer
Wrong Answer

Separate loan options, sometimes called piggyback loans, can be taken out to cover the down payment, but they come with higher interest or variable interest rates.

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Sheriff's sales help you with this kind of purchase:
only old, abandoned properties
taking over payments for a defaulted mortgage
foreclosed properties
Correct Answer
Wrong Answer

Foreclosed properties are available for purchase through a sheriff's sale, which is a public auction.

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Rent-to-own involves what kinds of risks?
home value can drop a lot while renting
owners can change their minds
both
Correct Answer
Wrong Answer

Home values can change, so reading up on the pros and cons, legitimacy and potential fraud, of rent-to-owns homes is important and might tip your decision in one direction or another. Buyer, renter and seller beware may be a good rule of thumb. Agreeing to terms often years before finalizing a sale is fairly uncertain forecasting.

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In the economic climate of the 21st century , is it still a good idea to pay for a house with cash up front?
yes
definitely not
maybe
Correct Answer
Wrong Answer

Defining a "good idea" in a challenged housing market depends a lot on what the buyer hopes to achieve. If hoping to secure a long-term home without having to make mortgage payments, paying cash up front for a modest property at a low price can be a good idea. Putting a lot of cash into a property you hope to turn over at a profit in a short term may be a good idea depending on the location but potentially it's throwing away money if the value of the house keeps dropping. And in either case, the money might be better invested in a more certain cash maker.

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It's recommended you spend what percentage of your monthly income on all bills -- including a new mortgage and old debts?
less than 45 percent
less than 25 percent
less than 36 percent
Correct Answer
Wrong Answer

Though it would be much easier to manage finances if less than 25 percent of your income went toward housing and debt, many advisers say you shouldn't go above the 36 percent figure.

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If a homeowner falls behind and needs to default on a mortgage, which step will prevent poor credit reporting?
a short sale
a deed in lieu of foreclosure
neither
Correct Answer
Wrong Answer

Often a short sale is considered a "save" from a foreclosure and a deed in lieu is thought to be a way to hand over the keys to a property. Both steps, however, come with negative impact to a credit report, though most times less of a hit than a foreclosure.

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Are brand new houses less of a risk than older ones?
fewer expenses and troubles with the new
less risky investment with the old
both
Correct Answer
Wrong Answer

Buying a home is a risk either way, and while newer homes come with everything new, they may be poorly constructed, for example. Older homes can cost less and bring buying incentives if within a renaissance zone, but without upgrades, they can cost more to heat and maintain, among other considerations.

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How many months of mortgage payments should you have stored up in case you lose your job or have a medical emergency?
3 months
12 months
6 months
all of the above
Correct Answer
Wrong Answer

This answer really varies by how much a homeowner needs, but most financial advisers recommend homeowners have at least three months saved to cover expenses.

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You can fall behind how many months before a lender will start foreclosure steps?
4 months
3 months
2 months
Correct Answer
Wrong Answer

Typically, falling 120 days, or three months, behind will trigger foreclosure actions.

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PMI stands for which of the following?
Principal Mortgage Income
Partial Means Index
Private Mortgage Insurance
Correct Answer
Wrong Answer

Buyers who go into a home purchase with less than 20 percent for a down payment will have to pay for Private Mortgage Insurance, which protects the lender in case of a default on the part of the buyer.

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How are property taxes and homeowners insurance calculated each year?
they're a fixed amount
they depend on property value and premiums
by principal balance and salary
Correct Answer
Wrong Answer

Taxes depend on the value of the property when taxes are assessed, and insurance rates can go up or down depending on claims or home improvements.

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Having children can add how much in expenses each month?
bucket loads
not enough to notice
about $1,029
Correct Answer
Wrong Answer

According to the U.S. Department of Agriculture, Americans spend about $222,360 to raise a child more than 18 years, which breaks down to a monthly average of around $1,029, but it can be as high as "bucket loads" and either way is noticeable.

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Which resource should you turn to if you get in over your head after buying a new home?
nonprofit credit counseling agencies
a real estate professional
a loan flipper
Correct Answer
Wrong Answer

Credit counselors are available throughout the United States, and they offer options for working out mortgage and hardship issues. Real estate agents can't really help with financial matters after a sale, and loan flippers are predatory lenders, offering so-called refinancing that comes to nothing but more charges.

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What percentage of homes in the United States lost value in 2010?
more than 23 percent
nearly 10 percent
about 42 percent
Correct Answer
Wrong Answer

More than 23 percent of homes lost their value, which is a lot, but in some regions homes gained value and in others values remained the same. Still, that's $1.7 trillion in losses.

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What exactly is a "buyer's market?"
when there are more homes on the market than there are buyers
when there are more buyers than there are homes on the market
it's just a financial expression for a way of thinking about home buying
Correct Answer
Wrong Answer

If a neighborhood or region has more homes for sale than buyers, home prices can drop as sellers compete to sell their homes. It's a form of supply and demand where a buyer has the advantage. If there were 10 homes and 30 buyers, it would be a seller's market.

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What do Fannie and Freddie have to do with home buying?
A lot. They provide loans outside of bank loans.
Maybe nothing in the next few years or so.
both
Correct Answer
Wrong Answer

It's estimated that $5 trillion, of the $11 trillion in mortgages, in the United States come through the government's Fannie Mae and Freddie Mac lending programs. Phasing out these sources and returning loans solely to banks and lenders is a hot topic among legislators and financial experts in 2011.

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What kind of credit score do lenders look for from potential home buyers?
640 to 760
620 to 700
580 to 620
all of the above
Correct Answer
Wrong Answer

As the housing market adjusts to lots of losses and high foreclosure rates, lenders have started raising expectations for home buyers. Government and FHA loans might look for a 580 or better and banks could require 760 or better; there is a range of expectations. And getting approved with a low score is possible, but buyers will pay in high interest charges.

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You Got:
/20
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