Ask Yourself These Three Questions to Know if You're Ready to Buy a House
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You were taking peeks at listings on apps like Zillow and Redfin, fantasizing about that open floor plan, and taking in a ridiculous amount of shows on HGTV, but you were unsure if your dream of owning a home could become a reality. Then coronavirus (COVID-19) hit, causing uncertainty in every single market, including housing.
But although buying a house is a big task, it’s not impossible, even in the face of a global pandemic. And with many of us spending much more time at home, purchasing has been top of mind for a lot of people. But how do you know when you’re ready? We connected with a few housing experts to find out if you're ready to buy a house.
Steps to buying a house:
Is my credit score high enough for a loan?
Laura M. Morganelli, CFP at Abacus Wealth Partners, breaks down how to know when you're ready to purchase a home into two important factors: credit score and affordability. Your credit score will determine the type of interest rates that you're eligible for, and you have to be realistic about the expense of owning a home and whether or not you are stretching yourself too thin.
Through programs led by the Federal Housing Authority (FHA), the minimum credit score for an FHA loan is 580. However, most banks will require a higher score of at least 620. But be aware that some lenders are increasing their minimum score due to the pandemic. If your score is on the up and up and you’re ready to move forward, then you’ll also want to look at your debt and your savings.
A healthy credit score will help with your mortgage pre-approval, which most realtors require before taking you out to view homes. Especially at this time, these approvals are important because of how quickly houses are selling based on lack of inventory, according to realtor Joe Walker of Century 21 Gold Key Realty.
“The thought at the beginning was that the sellers would be distressed, but there’s so little inventory. The way we define inventory is that if you took the available houses on the market today and they sold at the rate they’re selling now each month, in a healthy economy you have about six months of inventory. Right now, we have two,” Walker explains.
Is my debt manageable?
To put yourself in the best position in a competitive market, it’s best to pay down any outstanding debts that you may have. This means any credit cards with small balances, and definitely anything that has gone to collections. With your debt at bay, it should aid in your ability to save for a down payment.
“[A] 20% down payment is not necessary to buy a home, although it is what every lender will most likely push for. However, qualified buyers can be approved for much lower down payments (around 3.5%). A few pros of putting 20% down are lower monthly fees, not having to pay private mortgage insurance (PMI), and more equity in your home,” Morganelli says.
Do I know how much the house is actually going to cost?
We don’t always think about the other costs, outside of the down payment, when considering purchasing a home, from closing costs to the mortgage application and inspection fees, appraisals, furnishing, and the all-important emergency fund (which should be three to six months of expenses in savings).
“My rule of thumb is: If a household has two streams of income, then three months is sufficient, but if there is only one stream of income, then six months should be the minimum,” Morganelli says.
In this process, you also have to begin thinking about a monthly payment and how much you can afford. According to Morganelli, your monthly payment shouldn’t exceed 28% of your gross monthly income. You should also think about the interest rate and the annual percentage rate (APR) associated with your mortgage. Both affect your monthly payment amount.
“The best way to determine if buying a home is the right decision is to take a look at the larger picture of how long you plan on staying in the area and [take] into consideration all the costs associated with homeownership and whether you are ready to take on those responsibilities and fees,” Morganelli explains. "If the answer is yes, determining how much you can afford and putting in the time and effort to get the right mortgage will be key in setting yourself up for success.”
Being realistic about your financial picture, your needs, your wants, and the time it takes to execute such a huge purchase is extremely important, but if homeownership is the goal, it’s definitely possible.