How to Know If You’re Ready To Buy a House

Housing Finances How to know if you're ready to buy a house

There’s a reason why most people equate buying a home with settling down. Buying a home generally means your life is stable, your job isn’t in danger and you’re probably married or in a serious relationship. If you’ve reached this stage of adulthood, it means you likely have an idea of what you want out of life.

Ideally, it also means your finances are in order.

But as much as you may want to stop renting and start owning, the home buying process isn’t for the faint of heart. Beyond that, home ownership comes with a host of potential problems and expenses that renters likely don’t need to worry about. A home is also the largest purchase most people make in their lifetime – so are you ready for that kind of commitment?

To find out, here are some tough questions to ask yourself before talking to a realtor. 

Are You Financially Secure? 

Before you start binge watching HGTV and picking out paint chips, ask yourself the following: Do you have an emergency fund? If so, how many month’s worth of expenses are in it? An emergency fund covers the bills when you lose your job, need surgery or have to travel to a family member’s funeral. It’s a crucial first step to financial stability.

With a fully-stocked emergency fund, you won’t miss a mortgage payment because you can’t work. It’s your final defense against losing your home due to circumstances out of your control. If you don’t have a solid three to six month’s worth of expenses in a savings account, you may want to keep working on that before buying a house.

The next question to consider is whether or not you have debt, and how much. If you have too much debt, you won’t qualify for a mortgage. Lenders look at your debt-to-income ratio to determine if you have enough available income to pay them back every month. Don’t know your debt-to-income ratio? There’s an app for that! Check out Intuit’s newest app Turbo to view your financial profile from a lender’s perspective and find out your free credit score.

If your job is steady, you have adequate savings and little debt, then owning a home is probably right for you. If you’re still dealing with lingering money issues, focus on tightening up your finances first. 

How Long Do You Want to Stay in the Area?  

When buying a home, you pay several fees upfront, including appraisal fees, inspection costs and loan origination fees. These fees will likely cost several thousand dollars, if not more. This means that, in general, you need to stay in the home for five to seven years to break even. If you sell your home before that time, the home’s value might not have grown enough to cover closing costs.

If you like to move around or work for a company that may transfer you to a different city, buying a home doesn’t make a whole lot of sense. Let’s look at a possible scenario. You buy a home in March, and in November your boss says the branch is being closed and you’re being transferred to another city. You can decline and find a new position where you live, or you can take the offer.

You like your job, so you accept the company’s offer. But now you have to sell your home in the two weeks before your moving date. Because that date is so close to Thanksgiving, you don’t get many nibbles on the listing. In the end it takes two months for your home to sell, while you’ve been stuck paying both your mortgage and new rent. 

Scenarios like this are more common than you might think, and illustrate why home ownership isn’t always the best choice – even if you can afford it.  

Are You Ready for Home Ownership? 

Home ownership looks easy on the outside, but the reality is a lot different than a Home Depot commercial. If you’ve been renting your entire life, you’ve always had a landlord to call when there’s an issue with the property. You’ve never had to worry about fixing leaking pipes or replacing the air conditioner when it breaks. As a homeowner, the buck stops with you. 

Experts say you should save 1% of the home’s purchase price every year for repairs, or $1 per square foot. This will cover both minor problems, like new mortar on your exterior, and major issues like replacing your roof.

Not only is it expensive to fix your house when something goes bad, it’s also time-consuming. Instead of calling the landlord and transferring the responsibility, it will be up to you to find a contractor, get multiple quotes and take time off work to deal with the problem. That’s not even mentioning the stress. 

If your budget can’t support putting an extra couple hundred dollars a month toward repairs – or you don’t want to deal with home repairs at all – you’re probably not ready to buy a house. In fact, some people happily choose to rent their entire lives, putting the money they would use on a house towards other investments. There’s no rule that says you need to own a house to be financially stable. 

What Kind of Home Do You Want? 

Before you start house hunting, you need to figure out what you’re truly looking for in a home. It’s easy to think “I’ll know it when I see it,” but that attitude usually leads to a long, drawn-out search process. If you’re ready to buy a house, you’re ready to get specific. 

The basic questions are easy – how many bedrooms you want, what neighborhoods do you like and what kind of yard fits your lifestyle, for example. Then, it gets more complicated. Do you need to be close to work or do you mind commuting? Do you have kids, and if so do you need to buy a home in a specific school district? Are you looking for a particular architectural style? 

If you’re married or in a serious relationship, talk to your partner about what kind of home they envision. Consider whether this will be a starter home or your dream house. The answer to that question will further narrow down what you’re looking for. 

Can You Save for a Down Payment?  

When you take out a mortgage, you have to put down a payment that acts as a deposit. The down payment gives you instant equity in the home and proves to the mortgage lender you’re capable of saving.

You need to have a down payment of at least 3-5% for a conventional loan and 3.5% for an FHA loan. On top of the down payment, you also need to pay for the loan’s closing costs, which are usually between 2-5% of the purchase price. The money needs to be in your bank account when you first apply for a mortgage. You can’t use a loan from your parents or anyone else as your down payment, because the lender will treat it as debt. 

If you can’t afford to save for the down payment, you probably won’t be able to qualify for the mortgage. Some loans, such as VA or USDA loans, allow people to buy a house without a down payment. There also are some first-time home buyer programs to help people save for a down payment, so look into those if you’re having trouble.  

What is Your Credit Score? 

Good credit is essential for buying a home and being approved a mortgage. You need a minimum credit score of 620 to qualify for a conventional loan, but some lenders require a score of 700 or higher. A 580 credit score is sufficient for FHA loans. If you have a poor credit score, a debt still in collections or a recent bankruptcy, you might not qualify at all. 

Before you attend an open house or sign up for notifications on Zillow, check your credit report at AnnualCreditReport.com. The report will show your entire credit history and reveal any red flags, like late payments or overdrawn accounts.

Next, look up your credit score for free through the Turbo app. This score won’t be the exact figure a mortgage lender sees when they pull your credit, but it’s a good approximation.

If your score is lower than 700, look at potential issues that could be dragging it down. Do you use a large portion of your credit every month? Do you have a bunch of recent hard inquiries? Is your credit history too short? Turbo will show why your score is low and even give ideas on how to fix it.  

Having a high credit score will also pay off when you get a lower interest rate on your mortgage. Locking in a low interest rate now will pay off in the long run, because you’ll save thousands or more over the lifetime of the loan.

Buying a home is one of the biggest financial decisions you’ll ever make, so it needs to be the right one. Don’t jump into anything because all your friends are buying a house or your parents are wondering when you’ll finally do it. Ask yourself these questions and you’ll know when the time is right. 

 

Comments (18) Leave your comment

  1. Good to know that I have to be married or in a serious relationship to know what I want out of life, and definitely to buy a house. Little old me had no idea, and might have done it on my own!

    1. Devin, with loans with less than a 20% down payment you will have to pay PMI (premium mortgage insurance). This can add up to several hundred dollars a month depending on the loan amount. In some markets with high prices you may have to take that route. But, if you can save the 20 percent do it … it’s almost like a car payment every month until your LTV is below 80 percent (and you’ll likely have to request it from the lender and pay for an appraisal to prove the value; it isn’t automatic).

  2. Laughing a little bit as someone who lives in a city where renting is actually more expensive than most monthly mortgage payments for the same kind of property. If you can afford the initial down payment, ownership is more affordable by a long shot. Plus no mention here of what goes into owning a strata property?

  3. You can get Redfin app and when you show under 20% down they calculate omissions taxes and insurance. No need to apply for credit, it is estimated.

  4. Thank you for mentioning that the minimum credit score needed in order to be qualified for a loan so the person needs to see if they have reached this yet. I know that I have at least 760 credit scores a year ago, but I am not sure if it lowers in time, especially if I did not take out a loan or credit in a while. It might be a good idea to check this out since I intend to buy a house in the near future.

  5. My wife and I want to buy a new home next year, so thanks for sharing this. I like your point about getting your credit score close to 700. I’ll be sure to focus on this so lenders are more likely to approve us for a mortgage.

  6. Buying a house is a big step in one’s economic future. This article is really nice to decide whether you are ready or not to buy the house. Keep up the great work. It helped me a lot. Thank you.

  7. It got me when you said that I need to have an emergency fund if I intend to buy a house because that will allow me to continue paying for my mortgage even if I lose my job. If that is the case, then my brother is more than ready to get himself a house. After all, he mentioned that his emergency fund has reached hundreds of thousands when he last checked. He’s thrifty, so this is to be expected.

  8. This is really good information for people on the fence about whether they should continue saving or are ready to make a purchase! There are so many incentives that are only going to backfire on you so it’s good to see some valid information here!

  9. One thing worth mentioning is that you also need to be flexible and willing to make compromises, regarding both the kind of home you want or especially in the location it may be in (among potentially dozens of other tradeoffs). As just one example, it’s very common to envision a kind of house you want… only to find that it’s not available in your price range… or, if it is available in your price range, not available in the neighborhood or even town you hope to live in (or on the kinds of property you want, or any number of combinations).

    Unless you’re building a brand new home on a lot you own well beforehand, you can only buy what the market makes available for you to buy, a situation out of your control. Within the confines of your desires and your budget, you need to prioritize and rank needs versus wants… and knowing what you don’t want or need is as important as knowing what you do. Welcome to the compromises of homeownership!

  10. You might think you make enough money to buy a home, but crunch the numbers first and see what your costs would actually be — a mortgage calculator can come in handy here. Thanks for sharing a great article.

  11. Does it matter if you filed a chapter 13 and paid off your debt or if you filed a chapter 7 and wrote it off, as far as bankruptcy goes?

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