Buying a house is one of the most important financial decisions a person makes in their life. You may be eager to stop paying rent and start building equity on your new home, but how can you know that you’re ready to buy a house both financially and in terms of your life situation? Here are a few things you should consider to find out if you’re ready to buy a house.
Am I in the right place in life to buy a house?
When deciding to buy your first home, it is important to figure out how long you expect to stay in it. First, consider the area where you live. Do you absolutely love it and can’t imagine living in a different city or state? Or do you think that it would be nice to live closer to your family or move to a bigger city? If you are not completely satisfied with where you live, it might be better to hold off on buying a home. Next, think about your job. Is there a chance that you might get a promotion and have to move elsewhere for your career? Or that you will find a better job in a different area? If so, don’t rush to buy a home, as it can take anywhere from a year to four years worth of mortgage payments to break even on a house compared to renting a unit for the same amount of time. Finally, what is your love life like? If you’re married and thinking of starting a family, make sure that the house you buy is large enough for a child or two, or else you might lose money if you have to move soon.
Is my financial situation good enough for buying a house?
To evaluate whether your financial situation is stable enough for buying a house, you need to consider your debt, credit score and saving for a down payment.
First, look at your credit score. If your credit score is 760 or higher, you will be able to get the best possible interest rate on your mortgage. If your score is lower than 760 but higher than 620, you should be eligible for most loan products from banks, giving you lots of options when choosing a mortgage. Finally, if your score is between 580 and 620, you can get an FHA loan, but you won’t be eligible for many mortgage options, which means that your final loan terms won’t be great.
Next, evaluate your debt situation, as lenders will take into account your existing debt and expected monthly mortgage payments to evaluate whether you’re eligible for a loan. Your monthly debt payments should take up no more than 40% of your gross monthly income and your housing expenses including mortgage payments, insurance and taxes should make up no more than 32% of your gross monthly income. Therefore, if you have lots of debt, your mortgage payments will have to be quite low in order to be eligible for a loan.
Finally, before you can buy a house and take out a mortgage, you will need a down payment. Traditionally, the target down payment sum is 20% of the cost of the house. However, there are lots of opportunities for you to get a loan with a lower down payment. In fact, the average down payment for first-time buyers is just 6%.