Are you daydreaming about leaving your renter days behind and finally owning a place of your own? Congratulations! You’re about to embark on the exciting adventure of homeownership.
Before you hit the open house scene, let’s take a moment. Home ownership is a big step. Yes, there are paint swatches and decisions about countertops in your future, but there are also down payments, homeowner’s insurance, moving costs and many other expenses to consider first. You need to be certain you’re truly prepared for this big financial decision.
So, how do you know when you’re ready to buy a house? To help answer that question, start with these five readiness measures.
#1: You’re Driven to Be a Homeowner
If you’re itching to buy a home, think about what’s prompting those feelings. Do you want to purchase something because you’ve heard it’s a good time to buy? All your friends are doing it and you are feeling left behind? Or are you simply feeling ready to take on the position of homeowner — whether it’s because you’re preparing and budgeting for a baby on the way, you’ve found a community with a neighborhood vibe that’s your jam or you’re looking to live closer to your family. There isn’t one right reason you should buy a home, but you should make sure you’re doing it for yourself.
A lot goes into buying a home, but you have an ally by your side every step of the way. Sign up to get your free guide for the ultimate homebuying experience.
#2: You’re Financially Good to Go
Whether purchasing a condo or a three-bedroom ranch in the suburbs, you’ll be on the hook for immediate hefty expenses, like a down payment and closing costs. Homeowners also have ongoing costs like maintenance, utilities, property taxes and potential renovation costs. So before you buy a house, you should assess your current and long-term financial picture. Do a status check of your emergency fund. Judge how stable your income is. Determine if your retirement savings is on track.
#3: Your Debt Is Well Managed
You don’t need to be debt-free to realize your home-owning dreams (in fact, having some debt can be good financially). But before you start house hunting, make sure you have a strong handle on your debt-to-income ratio or DTI. Most lenders use this industry standard to determine how much house you can afford.
You can calculate yours by adding the total amount of your new monthly mortgage payment to your existing monthly debt payments, then divide by your gross monthly income. The result is the percentage of your monthly income that goes towards paying down debt. Typically, lenders are looking for a DTI of 43% or less.
Pro Tip: Take the stress out of budgeting for a mortgage. Our Home Affordability Calculator can help you estimate your home-buying budget.
#4: Your Credit Score Is in Good Shape
A strong credit score is your golden ticket to many important stops on your financial journey, and home buying is no exception. Interest rates are at near historic lows, making it more affordable for you to borrow money to purchase a home — as long as you have a good credit score. What’s considered a good credit score? Anything between 740 and 799 is considered very good, and a score above 800 is excellent.
Pro Tip: It’s always good practice to compare interest rates from at least two lenders before you sign on any dotted lines, in order to minimize the total amount of interest you’ll have to pay over time.
#5: You’re Prepared for the Down Payment
You have a lot of costs to consider when home buying, with one big one being the down payment (i.e. the percentage of your home’s purchase price that you pay up front to secure your home loan). While 20% is referred to as “standard,” it’s not required. In fact, the average down payment is only 12%. The important thing to know is when it comes to down payments is: You have options.
If you qualify, you can buy a home with as little as 3.5% down with an FHA loan. And a HomeReady mortgage (available through many lenders including Ally Home) requires you to put just 3% down. However, if you put down less than 20%, you will need to factor in additional costs such as private mortgage insurance (PMI), which can cost between 0.5% and 1% of the entire mortgage loan amount annually. Plus, the smaller your down payment, the larger your monthly payment will be, and you could potentially be charged a higher interest rate, too.
Alternatively, if you are able to pay a down payment of 20% or more, it can lower your monthly payment, earn you a lower interest rate and lenders will be more likely to compete for your business.
Buying a house is a big step — one you want to be financially prepared for. Determining your readiness now will help you stay ahead of any money-related challenges later in life.
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