While there are plenty of external factors that influence a person’s decision to buy a home, the most important factors are personal.
Consider your own personal comfort where you are now. Are there things you wish you had or were able to do at your current place?
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Are you happy renting or do you want to start to build equity?
When the time is right to move on, you’ll know. And once you make a decision, it’s time to look at your finances.
Let’s take a look at some signs that indicate you’re ready to buy a house, and help you determine if you’re financially prepared to take on the responsibility.
How to decide if the time is right to buy a house
Often, our personal timelines aren’t aligned with the economy’s ups and downs or what others are doing, even if it seems like everyone is making the same moves at once.
For example, when the housing market is scorching hot and competition is high, does this mean you wait, or join in on the action?
If mortgage interest rates are rising and most people are backing down from the market, should you wait, too?
Fortunately, the answers to these tough decisions lie with your personal finances and overall life goals, rather than what your friends, family, and neighbors are doing.
Let’s dig into some signs that indicate whether you’re in the right space to move ahead with a home purchase.
You’re ready to settle down
Many financial experts agree that staying in a house for at least five years is the smartest financial move.
If you don’t think you’ll be hanging around an area for that long, it might not be time to settle down just yet.
On the other hand, if you are happy and thriving at your job, love the area you’re seeking out, and plan to stay there for at least five years, it may be the right time to begin your home search.
Your debt is under control
It’s okay to have debts and want to buy a home, as long as you’re actively working on paying down your debts and have the process under control.
A lender will calculate your debt-to-income ratio (DTI) to determine how much of your monthly income goes toward paying down those debts.
They use this figure to see whether they think you can afford a monthly mortgage payment on top of all your other debts.
You can calculate your DTI on your own by dividing your monthly debt from your gross monthly income, and multiplying by 100.
For example, if you make $6,000 a month and your monthly debts total $1,500, your DTI ratio is 25 percent.
Many lenders look for a DTI ratio that’s below 43 percent, but some accept up to 50 percent.
Your employment history is stable
One of the most important ways for a lender to have confidence that you can afford your monthly payments is to look at your employment history.
To prove your job history, your lender will typically ask for your past two years of W-2’s.
If you’re self-employed, they will at least want to see your tax returns and 1099s.
While it’s not ideal if you jump from job to job in under two years, it won’t necessarily be held against you unless your income isn’t steady or isn’t increasing.
Typically, lenders prefer to see that you’ve stayed at the same job for a considerable amount of time.
You have a healthy credit score
Credit score requirements vary by lender and loan type, but it’s helpful to have as high of a credit score as possible prior to applying for a loan.
Credit score ranges also vary, but generally are ranked similarly to the following:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Excellent: 800-850
You don’t need an “excellent” or “very good” score to qualify for a mortgage.
In fact, you don’t even need a “good” score in most cases. But the higher your score, the better your interest rate will be.
This can mean a difference in thousands of dollars over the life of your loan.
The best ways to boost your credit score over time are to pay down high-interest debts, such as credit card debt or student loans, and make all payments on time.
Borrowers are allowed to request one free credit report from each of the main credit bureaus per year, without penalty.
This way, you can keep track of your score and ensure all charges are correct so you don’t have to dispute any errors.
You have adequate savings for a down payment and closing costs
You’ve probably heard that it’s best to have up to 20 percent of the home’s purchase price saved for a down payment.
However, this is usually just if you want to avoid paying private mortgage insurance (PMI).
Otherwise, many lenders accept a much lower down payment. But in addition to the down payment, you’ll want to have around 3 percent to 6 percent of the home’s purchase price saved for closing costs and fees.
You’ll also want to factor in some reserves in case of emergency, plus all the other costs of homeownership, such as property taxes, homeowners insurance, utilities, and maintenance.
These are considered the “true costs of homeownership” that some new buyers forget to account for before they begin the process.
You feel ready for responsibility
Just like there are true costs of homeownership, there are also true responsibilities that come with owning a home.
When it’s your own home, you are responsible for all of the upkeep and maintenance. If you previously lived in only apartments, it can be an adjustment to keep up with yard work, snow removal, and routine maintenance.
In addition to the physical upkeep, consider your financial situation and habits. You may need to adjust your budget to account for different utility costs, living expenses, and still have wiggle room for emergency savings.
The bottom line is that buying a home is a major decision and shouldn’t be taken lightly.
Ready To Take Your Next Step?
Apply for preapproval today with Compass Mortgage
The first step in the homebuying process is applying for preapproval.
Some prospective buyers prefer to apply up to a year or more before they’re ready to purchase, because it gives them a full picture of their finances and reveals how much house they can actually afford.
From there, they can step back and determine which areas need work before applying again in the future and moving ahead with house hunting.
If you’ve read the signs for when to buy a house and think you’re ready to move ahead, apply now with the lending professionals at Compass Mortgage. Better yet, talk to one of our loan officers about Get Committed®, our unique program for a loan commitment which goes beyond preapproval to help you buy the home of your dreams.
We are “Home to a Better Mortgage Experience,” combining our love and respect for our customers with an unmatched experience.
We will go above and beyond for you in your journey to buying your dream home.
Photo by Dhruv Mehra on Unsplash