Signs That You are Ready to Buy a House
While buying a home can be a financial milestone and a long-term investment, homeownership is also a major responsibility. So it’s important that you don’t purchase until you’re absolutely ready.
How do you know when you are ready to buy? Here are seven signs that it might be time to take the leap.
You Have Good Credit
Credit scores range from 300 to 850. Fortunately, you don’t need the highest credit score to qualify for a mortgage. However, waiting until you have a strong credit history can help you receive a lower interest rate.
Check your own credit before applying for a home loan. You’ll typically need a minimum credit score of 620 to qualify for a conventional and VA loan, and a minimum score of 640 for a USDA loan. An FHA home loan requires a minimum credit score of 500 to 580.
Ideally, you should wait until your credit score is at least 740 or higher to secure the best interest rate, which keeps the monthly payment within an affordable range.
Keep in mind that lenders consider more than your actual credit score. To qualify for a home loan, you shouldn’t have any late payments on your credit report during the previous 12 months.
If you’ve paid your bills on time for the past couple of years — which demonstrates creditworthiness — you shouldn’t have a problem getting approved, providing you meet other requirements of a particular mortgage program.
You Have Steady Income
Steady income and employment are another criteria for a mortgage loan. This is important to ensure you’re able to afford the monthly payment, as well as other expenses that come with homeownership.
If you’re buying a home with more square footage, take into account higher utility costs. In addition, you’ll need extra income to care for repairs and maintenance. Don’t apply for a home loan until you are confident in your ability to handle the financial responsibility, and only if you are stable in your career and expect your income to continue into the foreseeable future.
Be mindful that getting approved for a mortgage requires at least two consecutive years of employment, preferably with the same company. You’ll need to provide two years of W-2s and your most recent paycheck stubs.
If you are self-employed, be prepared to provide tax returns for the previous two years. Tax returns must show a profitable business.
You Have Enough for a Down Payment
A down payment is one of the biggest obstacles to getting a mortgage. One sign of being ready to buy a house is having a cash reserve that’s large enough to cover mortgage-related expenses.
Depending on the chosen home loan program, you’ll need a minimum down payment between 3% and 5%. But you can always purchase with a larger down payment, say 10% or 20%.
A higher down payment reduces the mortgage amount. Also, you avoid private mortgage insurance (PMI) with at least 20% down. PMI protects your lender in case of default.
Down payment requirements vary by mortgage. FHA home loans require between 3.5% and 10% down, whereas the minimum down payment for a conventional home loan is 3% to 5%.
USDA and VA home loans don’t require a down payment.
Along with covering your down payment, you’ll also need to save for closing costs. These fees can cost an additional 2% to 5% of the sale price. Closing costs cover mortgage and third-party fees associated with getting a loan. These include the origination fee, appraisal, attorney fee, title search fee, prepaids, etc.
You’ll Maintain a Cash Reserve
You might be ready to buy a house if you have a cash reserve that’s separate from your down payment fund.
Buying a house can be a new financial responsibility. Therefore, you shouldn’t drain your saving account on a home purchase. There are no hard or fast rules regarding how much to maintain in reserves after purchasing a home. However, you should aim to maintain at least two to three months’ worth of mortgage payments in savings.
Additionally, make sure you’re able to add to this reserve each month after buying the home. If purchasing a home will prevent saving money, now might not be the right time to buy. You can postpone a home purchase until your income increases or buy a cheaper home so that you’ll have disposable income to grow your emergency reserve.
You’re Ready to Settle Down
Buying a home also makes sense if you are ready to settle down and don’t foresee moving for at least a few years.
The upfront cost of buying a home can deplete a percentage of your savings. Therefore, you should live in the property long enough to recoup what you paid in closing. Also, staying in the home for at least a few years gives the property an opportunity to appreciate in value, allowing you to sell for a bigger profit.
If you purchase a home and then sell the property a year later, you could potentially lose money or only breakeven after paying a real estate agent’s commission. If you’re thinking about buying a home, plan to live in the home for at least three to five years.
You’re Tired of Renting
It’s also time to purchase a house if you’re tired of renting. There are some benefits to renting. For example, you don’t have to pay for upgrades, maintenance or repairs. However, renting also has limitations. Your landlord may not allow certain changes to the property, and your monthly rent can increase year over year.
Being a renter also means that you’re paying someone else’s mortgage, and when you move, you don’t get any of this money back. Homeownership, on the other hand, is an opportunity to earn equity and increase your personal net worth. And unlike renting which continues indefinitely, you’ll eventually pay off a mortgage loan.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.