Almost every young renter out there has probably heard something along these lines from their friends and family in the past year or so: “You’re still renting? But rates are so low! You should buy now while the market is still down.”
Granted, nearly everything about the suggestion above is factually correct. Mortgage interest rates are still at historically low rates, though starting to move up, and in many areas the real estate market is still depressed, causing home prices to be significantly lower than they were a few years ago. So in this sense, buying a home right now is a good idea.
But just because economic conditions are favorable for home buying doesn’t mean that now is necessarily the right time for you to purchase your first house. Everyone’s personal financial situation is unique, and buying a home is a big financial commitment that shouldn’t be rushed into. It is also a lifestyle commitment, so how do you know if you’re ready to buy your first property? Ask yourself the following questions:
1.) Am I Planning to Stay In The Area for At Least 5 Years?
In general, real estate experts agree that it’s probably not a smart decision to buy a property if you’re not planning to stay in your home for at least five years. The reason for this is that the process of buying and selling a home costs money – when you’re purchasing a house you have to pay closing costs, moving costs, etc. When you’re selling a home, you have to pay realtors’ fees. If you end up selling your home in less than five years, you probably won’t have had a sufficient amount of time to build enough equity in the property to make your home purchase a worthwhile investment after factoring in all the costs described above. So if you think there’s a good chance you might be moving soon, it’s probably not a good time for you to buy.
2.) Do I Know What My Credit Score Is?
One of the most critical factors when it comes to being able to buy a home is your credit score; lenders use this piece of financial information to determine if you’re eligible to obtain a mortgage and, if so, what interest rate you’ll pay on it. In general, if your credit score is below 650, it might be difficult to obtain a conventional mortgage. However, there are government programs through the federal housing administration (FHA) that may allow you to purchase a home if your credit score falls below this threshold. The important thing is to know your score so that you can begin researching mortgages with all the facts at hand. If you’re in the dark about your credit score, check out a reputable website like Credit Karma to get clued in.
3.) How Much Do I Have In Savings?
Another consideration when you’re buying a home is your savings. Broadly speaking, most banks would like you to be able to supply a down payment of 20% of the purchase price of your home (that’s a hefty $40,000 on a $200,000 home.) This will allow you to avoid having to pay costly private mortgage insurance (PMI) to your lender every month. If you don’t have 20% saved, you’ll still be able to get a mortgage, but keep in mind that PMI will be an additional monthly cost you’ll have to contend with.
In addition to the savings you’ll need for a down payment, it’s you should also have an additional 3-6 months of living expenses in the bank in case you get laid off or face some other serious emergency, so take a careful look at your savings when deciding whether or not to buy a house.
4.) How Much Existing Debt Do I Have?
When a lender is deciding whether or not to provide you with a mortgage, one of the crucial pieces of your personal information they’ll need to look at is your debt-to-income (DTI) ratio. Usually, lenders want to see a DTI of less than 35%. You can calculate your DTI by dividing your total monthly debt obligations by your gross monthly income. For example, a person with a $200 student loan payment and a $250 monthly car payment would have a total monthly debt obligation of $450. If we divide that number by her gross monthly income of $3,000, we find that she has a DTI of 15%, which is favorable. Be sure you know how much debt you have compared to your income before you start shopping for mortgages – you don’t want you broker turning up a nasty surprise.
5.) How Knowledgeable Am I About The Home Buying Process?
Do you know all the steps involved in purchasing a home? For example, do you know how to find a good realtor? Are you familiar with what a home inspection is? What about earnest money? And closing costs, what are they?
If your head is starting to spin, it’s time to get educated about buying a house. You should never go into a purchase this significant without having all the facts first. One good place to start your research is at your local library – there are lots of books out there about how to go about buying a home. If you’re more interested in online resources, CNN Money and Investopedia provide good tutorials for beginners.
Buying a home can be a great investment, but only if it’s the right time for you. Keep the tips above in mind as you decide whether or not to take the plunge into homeownership.
Our guest blogger, Angie Picardo, is a staff writer for NerdWallet. Her mission is to help consumers stay financially savvy, and save some money with the best online savings accounts.