Buying a house is one of the biggest investments you’ll ever make. Making the plunge into the housing market for the first time can be as nerve-racking as it is exciting.
You’ve been binge-watching home design shows, shopping online for furniture, and looking online for real estate, for fun. But how do you know if you’re actually ready to buy a house?
When you’re ready to buy a house, you’ll know the answer to a few of the basic finance questions below.
As you know your financial situation, your income, and the balance of your savings account, you’ll start to feel more prepared to get house hunting.
From your down payment to your monthly expenses, here are a few questions to ask yourself to help you know if you’re ready to buy a house.
1. Do You Have Your Finances in Order?
Frankly, if you’re wondering how to buy a home with no money, the answer is that you probably shouldn’t. Having your finances in order is one of the best things you can do for yourself before becoming a first-time homebuyer.
Having your finances in order means you know all of the income you have coming in, you know how much debt you have.
Start by making a spreadsheet of everything going in and everything going out.
Take note of your fixed expenses as these likely won’t change when you move. Things like your car payment, and student loans, won’t go anywhere after you purchase a house.
You’ll then want to estimate the cost of housing expenses like utilities and insurance. Things like your grocery bill, gas, fitness classes, and entrainment spending are places you can adjust if need be.
2. Will You Have Enough Saved for a Down Payment?
The next most important assessment you should make is in regard to your savings account. Putting down a healthy down payment is always a great choice if you’re able to.
If you put down at least 20%, you won’t need to pay costly private mortgage insurance known as PMI.
With a good down payment, your monthly mortgage payment will also be less, and you’ll instantly have equity into the home.
You will likely also have a lower interest rate which will lower your monthly payments as well.
3. How Is Your Credit Score?
When it comes to buying a home, your credit score matters. The lower your credit the more interest you are likely to pay.
If you haven’t done so already, the Federal Trade Commission allows you to download a free copy of your credit report each year.
Take a look at your credit score and your report and see if there is room for improvement. Paying off your debts is the first step toward raising your score.
Before speaking with a mortgage lender about financing, it can be helpful to pay off your credit cards and boost your score. This way when you go to get pre-approved, your score has already increased.
The lower your debt to income ratio is, the better your interest rate will be.
4. Can You Afford a Monthly Mortgage Payment?
Once you have assessed your bills, your income, and what you can afford to put down, it is time to start thinking about your budget.
Typically, it is best to keep your housing-related expenses under 30% of your income.
This is a good rule of thumb so that you can comfortably still afford to pay for everything else you need to in addition to saving for emergencies and ideally saving for retirement.
Don’t forget to include taxes, PMI if you have to pay it, homeowners’ insurance, and your utilities into this 30%. This may only leave 20% for your actual mortgage payment.
The last thing you want to do is to be spread so thin that if something breaks in your new home, you start to go into debt to fix it or use all of your savings.
5. You Set Your Budget
When you’re ready to set your budget, think about the big picture. The amount you spend on a house will affect your ability to pay for other things like traveling, and your savings rate.
Breathe easier by sticking to a lower monthly payment. If you can’t find your dream home within your budget, keep saving and work towards that goal.
Another way to stay within budget is to buy a home that needs a little updating. You can comfortably make your mortgage payments and do a little work overtime.
6. Do You Have Your Wish List and Target Location?
Before you start house hunting, look at your local real estate market. You can do a little homework online or start talking with a professional real estate agent.
You and your agent can come up with a list of realistic must-haves in a home. You’ll be able to see pretty quickly if you’re financially ready to get a home you’d like or if you need more time to save in your current situation or if you’re in an expensive market.
7. How Do You Know You’re Ready to Be a Homeowner?
The question, how do you know you’re ready to buy a house, can be answered by looking at the questions posed above.
If you have addressed your finances and feel like you can check all of those boxes, it might be time to start house hunting. After doing a little financial homework, you can finally start having fun and getting out there to see homes.
By assessing your debt, your income, your savings, and your budget, you’ll feel better about living comfortably in a home for many years to come.
Only you can say when you know you know.
If you’re ready to take the first step and start talking with a mortgage professional, get a quote here and get one step closer to becoming a first-time homebuyer.