How to Know If You’re Ready to Purchase a Home
It happens to the best of us.
You get tired of sharing walls with your neighbors, and you start to wonder what it would be like to move out of your apartment and into a house.
But paying a mortgage and owning a property? Those are big steps. Are you prepared to buy your first house?
Here’s how to know if you’re ready to purchase a home.
How Do I Know If I’m Ready to Buy a Home?
There are three areas of your life you need to examine for signs you’re ready to purchase a home: finances, commitment, and responsibilities.
Your Finances Are in Order
It all starts with money. If you’re living paycheck to paycheck and lean on credit cards to get you through the month, taking on a mortgage is probably not a good idea.
Low Debt & High Credit
You need to investigate and understand your debt-to-income ratio. You don’t necessarily have to be debt-free to buy a home, but if you are already struggling to make ends meet, buying a home will just add to your financial stress.
When you apply for a mortgage, your credit score will be a key component in determining the terms of your loan. The lender will use this number to predict how you will handle a large amount of credit.
If your score is high, you’re more likely to get a good interest rate and a lower monthly payment. Before you begin house hunting, you should take a look at your credit report and address any issues that may be bringing down your score.
Healthy Down Payment
You don’t need a 20% down payment to buy a house. However, if you can put down a large amount, you’ll be able to lower your monthly payments and pay cheaper closing costs. You can also increase your lender options and build more equity.
Let’s put the numbers into perspective. Here’s what a 20% down payment would look like for homes ranging from $150,000 to $250,000:
- $150,000 home—$30,000 down
- $200,000 home—$40,000 down
- $250,000 home—$50,000 down
Most people don’t have that much money to spare. The average down payment on a home in 2020 was 12% for all buyers, according to the National Association of Realtors. For first-time home buyers, it was even lower: 7%.
You’re in a good position to buy a home if you can offer at least 10% of the sale price upfront. That amount is still considered a healthy down payment and probably more feasible for your budget. Here’s how 10% down would change the numbers above:
- $150,000 home—$15,000 down
- $200,000 home—$20,000 down
- $250,000 home—$25,000 down
It’s worth noting you can get VA and USDA loans with 0% down, as well as FHA loans with 3.5% down. But, you’ll likely pay a higher interest rate, which means you’ll end up paying more money over the life of the loan. Additionally, your lender may require you to buy private mortgage insurance (PMI) if your down payment is less than 20%. However, some 100% financing options avoid PMI, which is great for first-time home buyers who only plan to stay in the home for 5-7 years.
To be ready to buy a house, you should also have a separate amount of money saved in an emergency fund, which should cover your living expenses for 6-8 months. You need to not only be prepared for whatever surprise expenses come with the house, but also unexpected life events.
At this point, you’ve calculated your monthly income to cover the mortgage and other recurring bills. Your mortgage payment should be no more than 25% of your take-home pay. If you’re forced to depend on your paychecks for emergencies, too, you’re not going to be able to pay for everything.
Your Commitment is Strong
Once you’ve decided your financial status is good, it’s time to consider how committed you are to buying a house.
You need to ensure you’ll have a steady income that will provide the means to maintain a home. If you change jobs often, or your position is not secure, this may not be a good time to become a homeowner.
Buying a house means putting down some roots. You should ask yourself if you’re ready to settle down and stay put for a while. Most real estate experts advise staying in a home for about five years.
If you’re hoping to achieve some other life goals soon, you must figure out how buying a home will affect those plans. You don’t want to take on too much at once. For example, if you’re thinking about building a business or starting a family, you may want to focus on homeownership first to feel more secure in those decisions.
You’re Mindful of the Responsibilities
Paying for a home is not just about the mortgage. If you’ve been a renter, your monthly payment may have included expenses you didn’t even know about. As a homeowner, those costs are billed separately.
When you buy a home, you’ll have to pay for property taxes and homeowners insurance (which may or may not be added to your mortgage payment) plus utilities. You may also owe homeowner association (HOA) fees.
Unexpected expenses (such as repairs) will inevitably pop up. When you live in an apartment, you can call the landlord when something breaks. The repair is made and you don’t pay a dime. As a homeowner, that responsibility now lies with you or the professional you hire to take care of it.
The bottom line is you need to be aware of all of the expenses that go along with owning a home so that you don’t end up house poor. You should be comfortable enough to handle the investment and still be able to enjoy outside activities such as dining out or taking vacations.
Are You Ready to Buy a Home?
Now you know all the factors you need to consider before purchasing your first home.
You know you’re ready to become a homeowner when your finances are in order, your commitment is strong, and you’re mindful of the responsibilities.
New Again Houses helps people buy and sell homes. Contact us today to see how we can help!