Do you have house on the brain? Can you not stop binging shows about realtors and home renovations? If you answered yes, then you could be thinking about buying a house. But are you ready?
Take this quiz to see if you are (ready, that is) — or read the article first and gain a little more knowledge before coming back to the quiz.
You may think that being ready to purchase a house is as simple as answering the question: Can you afford to buy one? But “afford” isn’t as simple as what’s in your bank account right now or the property’s sale price. Instead, you should take into consideration the following financial and lifestyle factors.
What’s your debt-to-income ratio?
The debt-to-income ratio or DTI is the industry standard many lenders follow to determine how much house you can afford. It’s calculated by taking the total amount of your new monthly mortgage payment plus your existing monthly debt payments divided by your gross monthly income.
The result is the percentage of your monthly income that goes towards paying down debt. What ratio do lenders look for when it comes to DTI? Typically, 43% or less.
Take the stress out of budgeting for a mortgage. Our Home Affordability Calculator can help you estimate your home-buying budget.
Can you afford a down payment?
Many lenders consider a 20% down payment the standard, but it’s not a must. In fact, the average down payment is just 12%. Ultimately, what you should know when it comes to down payments is: You have options.
Less Than 20% Down
A smaller down payment doesn’t necessarily mean that purchasing a home is out of the question. You can buy a home with as little as 3.5% down with an FHA loan. And a HomeReady mortgage, which is available through many lenders including Ally Home, requires you to put down just 3%.
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, you could have a larger monthly payment and potentially a higher interest rate.
20% or More Down Payment
If you can make a down payment of 20% or more, it can be a smart financial move because:
- You won’t have to pay for private mortgage insurance (PMI).
- Your monthly payment will probably be lower.
- You’ll likely earn a lower mortgage interest rate.
- Lenders will be more likely to compete for your business.
What’s going on in the housing market?
When thinking about becoming a homeowner, it’s essential to look into your desired location. You can work with a realtor or conduct research online about the following:
- Should you buy or rent? Which is more affordable?
- Is it a buyer’s market or a seller’s market?
- What’s the neighborhood vibe?
- What are the property taxes like in that area?
- Do you have a specific school district you’d prefer to live in?
And don’t forget to take your own lifestyle needs into consideration, too. Be sure to think about how close you want to be to your relatives and how long you’re planning to live in the home. Are you planning and budgeting for a baby on the way? How much additional square footage or clearly defined space do you need?
Interest rates are at near historic lows, and this year’s rate decreases mean that borrowing money is more affordable if you’re wanting to purchase a home. To increase your chance of being approved for the best interest rate, focus on your credit score. Scores between 740 and 799 are considered very good, and a score above 800 is excellent.
Take note: The lowest interest rate may not be your best deal. Compare interest rates from at least two lenders — though the more, the merrier.
Time of Year
Spring is typically the best time to buy, as it’s when most houses hit the market, but there can be benefits to off-season homebuying, too.
Don’t overlook other costs.
Savvy homebuyers examine all of the expenses associated with purchasing a home (including closing costs, which are 2 to 5% of the purchase price ) before taking the plunge. But they don’t stop there. So make sure you take future maintenance, utility, and potential renovation costs into account when determining if you’re ready to buy a house. After all, not all home improvements are created equal.
What’s your housing plan?
Whether you’re purchasing a modest ranch or a luxe property with a fabulous view that’s worthy of “Selling Sunset,” it’s important to think about all that’s required of a homeowner. Once you factor in all of these considerations, you’ll be able to decide whether you’re ready to buy a house.
Get pre-approved for a mortgage in just minutes.