8 Signs You're Ready to Buy a House

 1 year ago
source link: https://www.businessinsider.com/personal-finance/when-to-buy-a-house
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  • You may be ready to buy a home if you have savings left over after a down payment and closing costs.
  • Your debt levels and credit score will also indicate whether you're financially prepared.
  • If the house fulfills what you'll need out of a home for a few years, it may be a good time to buy.
  • See Insider's picks for the best mortgage lenders »

1. You have money for closing costs

The minimum down payment you'll need to buy a house will depend on which type of mortgage you need. It could be as high as 20% for a jumbo mortgage — or you may not need a down payment at all for a VA or USDA mortgage.

But a down payment isn't the only big upfront cost you need to think about. You should also prepare for closing costs.

According to data from mortgage technology company ClosingCorp, the average closing costs in 2020 were $6,087 with property taxes, and $3,470 without taxes. The amount you pay will also vary depending on where you live in the US.

2. You would have savings left over after closing

Let's say you spend all your savings on the down payment and closing costs. If an emergency happens in the next few days (or even months), you could be in trouble.

Ideally, you'd still have three to six months of expenses in an emergency fund after closing on your mortgage. This way, you can ensure your family will be taken care of if something unexpected happens.

3. Your debt is manageable

The general rule of thumb is that your housing payments (including mortgage, interest, insurance, and taxes) should make up 28% or less of your gross monthly income. All your debts combined should make up less than 36% of your gross monthly income. Remember, "gross monthly income" refers to the amount you earn before taxes are taken out.

Many lenders will still approve you for a mortgage if your debt ratios are higher. And you may decide you're comfortable taking on a little more debt than the 28/36 rule dictates. Just make sure you aren't digging yourself into a hole by buying a home.

4. You have a good credit score

You don't necessary need a great credit score score to buy a home. Many lenders will approve you for a conforming mortgage with a 620 score, and you could get an FHA mortgage with an even lower one. But chances are, you won't be approved for a mortgage if your score is under 500.

Lenders typically offer you a better interest rate when you have a higher credit score. So if you think you could raise your score in the next few months by making payments on time and paying down debts, you may want to hold off a little longer before applying for a mortgage.

5. You're ready for extra responsibilities

One nice thing about renting? Your landlord takes care of everything — from plumbing leaks, to a broken HVAC system, to roof repairs. Your past landlords may have even covered lawn care.

As a homeowner, you're responsible for repairs and maintenance. Make sure you're prepared for both the time and costs of fixing things yourself, or hiring someone to help you.

6. You've thought about the future

If you're expecting a big life change in the next couple years, remember to factor it into your homebuying decision. 

If you're planning to have a baby soon, make sure the house has enough bedrooms. If your child is going off to kindergarten next year, check which school district the home is in. If you're considering switching to a lower-paying job, think about whether you could still comfortably afford mortgage payments.

You may be ready to buy a home if you've already thought through everything that's coming your way in the next few years.

7. You can get a low interest rate

Mortgage rates are low overall right now, so it could be a good time to buy a home.

To take full advantage of low rates, check that your finances are in a strong place. This goes back to your credit score, debt-to-income ratio, and down payment. Lenders tend to reward better financial profiles with better interest rates.

8. You know what's going on in the housing market

You don't need to have in-depth knowledge about the real estate market to buy a house. But having a general understanding can help prepare you for the buying process.

It's a "buyer's market" when there are plenty of homes for sale in your area, which keeps prices reasonable. The US as a whole is a "seller's market" right now. There aren't enough houses for sale to meet the high demand, so prices are rising.

This doesn't necessarily mean you shouldn't buy a house, though. It just means it will probably be harder to find one you like for a good price than it would be in a buyer's market. But if you're willing to compromise or pay extra, you still may be ready to buy a home.

Laura Grace Tarpley is the editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.

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