A house could be the biggest purchase you’ll ever make. And although becoming a homeowner can feel like an exciting new chapter, you shouldn’t take on homeownership until you’re ready.
If you’ve been asking yourself, “Should I buy a home?” – you’re in the right place. Read on for a better understanding of what it takes to become a responsible homeowner and to gauge if you’re ready for next steps.
Key Takeaways:
- Potential home buyers need to save for up-front expenses, including a down payment and closing costs.
- Your credit score and debt-to-income (DTI) ratio will impact how much you can afford and your interest rate.
- It may be worth renting if you’re still building an emergency fund or don’t know where you’ll be living a few years from now.
6 Reasons Why You Should Buy A Home Now
Next to purchasing a car or getting a college education, buying a house is one of the biggest financial commitments you can make. The best way to start preparing is by finding out how much house you can afford, so you can feel confident that a home purchase won’t leave you in a financially precarious situation.
Let’s go over six signs that you may be on the right track to buy a home.
1. You Have Money Saved For A Down Payment
Saving enough money for a down payment is often seen as the biggest hurdle to becoming a homeowner. Many people think you need 20% of a home’s value for the down payment alone, but there are financing options with much lower down payment requirements.
| Loan Type | Minimum Down Payment |
|---|---|
| Conventional loan | 3% |
| FHA loan | 3.5% |
| VA loans | 0% |
| USDA loan | 0% |
Eligibility requirements apply, and minimums may vary based on credit profile and loan program.
Keep in mind that if you can afford to put more money down, making a larger down payment can help you avoid private mortgage insurance (PMI) on conventional loans, lower your monthly payment and result in less interest paid over the time of the loan.
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2. Your Debt-To-Income Ratio Is Low
Having debt doesn’t have to end your homeownership dream, but responsibly managing it plays a significant role in your financial stability.
Lenders consider this by looking at your DTI ratio, which is the percentage of your gross monthly income that goes toward paying off debt. It can be calculated by dividing your recurring monthly debt payments by your monthly income, then multiplying by 100.
The higher your DTI, the more susceptible you are to unfavorable loan terms when applying for a home loan. IIn general, lenders prefer to see a DTI below 43%–45%, though some programs allow ratios up to 50% with strong compensating factors. If you have a lower credit score, the maximum could be between 36% and 45%.
3. You Have A Strong Credit Score
Lenders look at your credit score to evaluate how you’ve handled debt in the past and to determine the details of your loan, like interest rates and how much money they’ll lend you. A healthy credit score is key to qualifying for the best payment terms on your loan. This means a track record of making on-time debt payments on things like student loans, auto loans and credit cards.
For many conventional loans, 620 is the minimum score, though some government-backed loans allow lower scores. Having an even higher credit score can help you qualify for a lower interest rate.
4. Your Income Is Stable
Income stability makes it possible to continue saving for emergencies and unexpected expenses that can arise when owning a home. While there’s no income requirement for purchasing a house, the amount you earn annually impacts your DTI and your approved loan amount.
Most lenders require 2 years of W-2s (or tax returns if self-employed) and recent pay stubs. If you want to use bonus and overtime income, you may need to show documentation from the past 2 years so lenders can get a sense of how much you truly earn on average annually.
5. You Desire Security And Stability
When considering the choice of “Should I rent or buy?” you should remember that a mortgage is a long-term contract that often lasts 30 years. Although that doesn’t mean you’re bound to that home for three full decades, the home buying process is far lengthier and more expensive than a lease. So for many people, it’s best not to buy a house unless you’re confident you’ll be in that area for a substantial amount of time.
If you travel a lot for work or leisure, or if you don’t yet know where you want to plant roots, you may want to hold off on buying a house. On the other hand, if you crave the freedom to control and personalize your living space while also avoiding rent increases, it’s worth considering the costs of renting versus buying.
6. You’re Preparing For The Future
If you have a big family, or plan to in the future, you might decide that buying a house is the best option for you. Consider what features will be important to you and your family – including location, proximity to goods and services (including schools) and property features, such as yard space or a home office.
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2 Reasons You Shouldn’t Buy A House Yet
The prospect of homeownership can be exciting. But if you’re not financially prepared, it could end up being more burdensome than rewarding. If you’re still asking yourself, “Should I buy a home?” here are two scenarios where the answer would be no – for now, at least.
You Don’t Have An Emergency Fund
An emergency fund is essential. It can prevent you from depleting your savings or going into debt when unexpected costs arise – a common occurrence for a homeowner.
If you don’t have an emergency fund yet, there’s no time like the present to start building one. Consider implementing the following suggestions:
- Calculate how much you need. Generally speaking, you’ll want to have 6 months’ worth of living expenses saved up.
- Focus on saving what you can. Even if you can’t manage a lot at first, the important thing is that you start saving.
- Create an emergency budget. This involves only spending money on the basic necessities and payments, so you can cut down on expenses and make your money last as long as possible.
- Save your tax refund. If you receive a tax refund from the IRS, it may be smart to put that money directly into your emergency fund.
You Have Other Financial Concerns
Issues such as unstable income, frequent job changes or high amounts of debt can be a barrier to homeownership. It’s a good idea to address these roadblocks and bolster your financial health before taking on the added responsibility. Learning how to save for a down payment is a good starting point once your emergency fund is in place.
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The Bottom Line: When Should You Buy A Home?
Buying a house is no small undertaking. But if you’re financially prepared and looking to settle down, it could be time to start your home buying journey. Before taking the leap, get ready by increasing your credit score, lowering your DTI and learning how much home you can afford.
Is it time for you to buy a house? today.
Breyden Kellam
Breyden Kellam is a writer covering topics on homeownership, finance, lifestyle and more. She is a graduate of the University of Michigan with a bachelor's degree in English. With a deep love for all things literary, Breyden is passionate about using her words to touch hearts and positively impact lives.
