Buying a house is one of the largest investments you’ll make, and it’s not something that you should take on lightly.
There are a lot of things to consider when you’re thinking about buying a house. The location, the size, the amenities – it’s a big decision. But one of the most important factors to consider is whether or not you’re financially prepared.
Here are nine ways to tell that you’re financially ready to buy a home.
1. You have a Stable Income
You shouldn’t buy a home until you’ve stabilized your income. If you’re still wondering what you want to be when you grow up, it’s not a time to buy a house.
To determine if your income is stable, look at your past and future income. For example, have you had the same job or at least been in the same career for several years? Are you happy with your position and see yourself staying there for the foreseeable future?
Is the industry you work in stable, or are they still feeling the effects of the pandemic? You should wait to buy a house until you know your employment and income are as steady as possible.
2. You have Minimal Debt
Most borrowers have some debt, but getting in over your head in debt can make it hard to afford a mortgage. A big part of your mortgage application is your debt-to-income ratio or a comparison of your monthly debts to your gross monthly income.
Most lenders look for a maximum debt-to-income ratio of 36%, including your new mortgage. If you already have too much high-interest consumer debt, there may not be enough room in your budget for a mortgage.
Work on paying your debt down before applying for a mortgage. The less debt you have, the easier it is to afford a mortgage.
3. You Have Money for a Down Payment
Most loan programs require a down payment, even if it’s small. At a minimum, expect to have 3% of the purchase price as a down payment. That comes down to $3,000 for every $100,000 in sales price.
The more you put down on the home, the lower your mortgage payment will be. You’ll also have instant equity in your home, which helps increase your net worth and makes it easier to qualify for a mortgage.
4. You can Afford the Closing Costs
In addition to the down payment, you’ll pay closing costs too. While the closing costs vary by lender, you’ll pay 3% – 5% of the loan amount or $3,000 – $5,000 for every $100,000 you borrow.
The closing costs are often a stumbling block for borrowers because they focus only on the down payment. Having enough cash left to cover closing costs and having some funds left over is the key to success.
5. You can Afford the Mortgage Payment
No matter how much money you have saved for a home when you borrow a mortgage, you agree to make payments for the next 15 – 30 years, depending on the term. So make sure you review your budget and ensure there’s enough room for the payment in your budget while still meeting your other financial obligations.
6. You have an Emergency Fund
Owning a home is a big responsibility. Not only do you need money for the mortgage payment, but you must also cover the cost of home repairs, renovations, utilities, taxes, and insurance.
Life can get expensive when you own a home, especially when emergencies happen, like losing a job or falling ill.
An emergency fund can help reduce the risk of financial troubles when you own a home. The average homeowner should have 3 to 6 months of expenses to cover the mortgage, household bills, and groceries.
7. You Have Money Saved for Retirement
Your house may be a part of your retirement plan, but you must supplement too. Funding your 401K or IRA is important, even before you buy a home. At the very least, ensure enough room in your budget to meet your employer’s match.
For example, if your employer matches the first 3% of your income and you make $75,000, make sure you have enough room in your budget to contribute at least $2,250 to your 401K to get the free $2,250 from your employer to help reach your retirement goals.
8. Your Credit is in Good Standing
Your credit score is the first thing lenders look at when you apply for a mortgage. You may not qualify for the best loan programs if you don’t have good credit.
You don’t need perfect credit but aim for a credit score of 680 for the best rates and terms. If you aren’t sure what your credit report looks like, pull your free reports here. If you notice negative marks on your credit report, do what you can to fix them before applying for a mortgage.
- Late payments (payments more than 30 days late)
- Credit lines extended over 30% more than their limit
- Incorrect information regarding payments or balances
- Accounts that don’t belong to you
9. You Have Money for Maintenance and Repairs
The average homeowner spends 1% of their home’s value on maintenance and repairs. Of course, what a home needs vary by home, but it’s always best to have at least 1% or $1,000 for every $100,000 in value reserved for maintenance and repairs.
While it can be hard to do, knowing when you’re ready is important. The key is to prepare yourself financially before applying for a mortgage. This includes making sure you have enough money for a down payment, closing costs, and unexpected maintenance and repairs.
Before taking on a mortgage, review your budget and ensure you can afford the monthly payment without too much sacrifice. This will ensure you can comfortably afford your mortgage without financial stress.