November 28, 2019

Are You Ready to Buy a House

Read more about Mortgage

Just because you can afford to buy a house doesn't mean you're ready. Buying a house is a big responsibility. Here's how to find out if it's the right choice for you.

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Investing in a home is a big endeavor. You'll need to meet certain financial requirements and be mentally prepared to take on the responsibility of homeownership.

Below we cover everything you should consider before taking the plunge.

Top Signs That You Are Ready to Buy a House

So what does it take to buy a home? Ideally, you should have:

  • Money saved for a down payment and closing costs
  • A decent credit score
  • Steady income
  • Minimal or affordable debts
  • Ability to comfortably afford mortgage payments

But not all indicators are financial. Potential homeowners should also feel:

  • Ready to stay put for at least five years
  • Secure in their current job/industry
  • Ready to handle or pay for home repairs
  • Confident in their financial responsibility

How can you ensure that you're meeting each of these requirements? Keep reading.

How Much Do You Need for a Down Payment?

There is no one-size-fits-all amount needed for a down payment. Here's a breakdown of specific mortgage programs and what they require:

  • FHA
    3.5% down payment

  • Conventional
    5%–20% down payment

  • VA loans
    None required (for veterans of the military)

  • USDA loans
    None required (for rural, low-income borrowers)

First-time homebuyers often have the hardest time because they're unable to take advantage of existing home equity. In other words, they may need to save for a long time before they have enough for a down payment.

Veterans and rural, low-income borrowers may be able to avoid a down payment with VA or USDA financing. Even FHA borrowers can get away without investing any of their own. The FHA allows borrowers to get 100% of the down payment as a gift from family, employers, or charitable organizations.

While it may be possible to buy a home with no money down, that may not be the best option. In today's real estate market, your home value could rise or fall in the blink of an eye. And without a down payment, you could easily end up owing more than what your home is worth.

Owing more than what your home is worth is known as being "underwater" or "upside down." You want to avoid this scenario when buying a home.

What's Your Credit Score?

To qualify for any loan program, you'll need a credit score that's considered "Average" to "Good." Like down payments, each loan program has its own minimum credit score requirements:

  • FHA loans
    Minimum 580 credit score

  • Conventional loans
    Minimum 660–680 credit score

  • VA loans
    Minimum 620 credit score

  • USDA loans
    Minimum 640 credit score

Keep in mind that lenders will review your financial habits and overall credit history too. Do you overspend on your credit cards and pay bills on time? Are you carrying a lot of outstanding debt?

Lenders will consider your overall financial health, especially activity within the last 12 months.

Ideally, you should have a good mix of installment credit and revolving credit. But revolving debt (credit cards) puts you at a higher risk of default.

A few credit cards and a mixture of installment loans (outstanding or paid) shows lenders that you are dependable and able to take on the responsibility of a mortgage.

How's Your Job and Income Stability?

Job and income stability are important to lenders. With a mortgage, you're typically agreeing to make a sizeable monthly payment for the next 30 years. If you don't know where your next paycheck is coming from, making that regular mortgage payment can be nearly impossible.

Read on to learn more about some specific scenarios.

Can You Buy a House Without a Job?
Buying a home without a job is like trying to buy a home without money. Unless you are a millionaire with sufficient liquid investments, most lenders will require you to have some type of employment to get your first mortgage.

Can You Buy a House if You Just Changed Jobs?
If you change jobs right before you apply for a mortgage, you may have to wait 30 days to 6 months before a lender will use the income to qualify you for a loan. But don't assume you are automatically disqualified.

Lenders are more likely to understand a job change within the same industry, especially if it was for better pay or a higher position. If you completely changed industries, you may have a tougher time.

In general, lenders need to see that you have the potential for a successful career and the ability to make smart decisions. If you changed industries, you need proof of proper training, education, or other qualifying factors that show why switching jobs was a smart choice.

If you are frequently changing jobs, now may not be the right time to buy a home. Ideally, you'll need at least two years in the same job to get your mortgage application approved.

And don't change jobs after getting pre-approved by a lender or during underwriting. Try to stick it out until you reach the closing table.

How Much Money Have You Saved?

Reserves are considered "extra money" used to cover emergency expenses. Most loan programs today don't require borrowers to have reserves on hand. However, you should still consider how much you have saved.

Think about what would happen if the water pipes burst in your house. Do you have enough money saved to call an emergency plumber? What happens if the roof starts leaking?

Unlike renting, all repairs and maintenance responsibilities fall on you. You can hire someone to do the job, but you still need the money to do so.

On average, standard house maintenance costs 1% of the home's value every year. For example, a $250,000 home may have approximately $2,500 per year in routine maintenance. This doesn't include sudden emergencies.

Give careful thought to the money you have available (in a liquid account) after you cover the down payment and closing costs.

Closing costs vary depending on the type of loan. But expect to pay 3%–5% of the loan amount. On a $200,000 loan, this means $6,000-$10,000 in addition to your down payment.

How Much Debt Do You Have?

Many people assume you must be debt-free to get a mortgage but that's not the case. In fact, a history of installment and revolving debt shows you can manage your finances responsibly.

So how much debt is too much? Lenders have specific debt-to-income ratios they adhere to:

  • FHA loans
    31% housing ratio, 43% total debt ratio

  • Conventional loans
    28% housing ratio, 36% total debt ratio

  • VA loans
    41% total debt ratio

  • USDA loans
    29% housing ratio, 41% total debt ratio

Understanding Debt Ratios
The housing ratio is the total of the principal, interest, real estate taxes, homeowner's insurance and mortgage insurance divided by your gross monthly income.

The total debt ratio is the total of your minimum credit card payments, installment loan payments, personal loan payments, student debt payments, alimony, and child support payments divided by your gross monthly income.

Before you decide if you are ready to buy a house, put the numbers on paper. Imagine adding that mortgage payment to your monthly budget. Do you have enough money left over for your other monthly expenses?

You want to feel comfortable taking on the new payment, because it will be yours for the next 30 years (unless you sell or refinance your mortgage).

Are You Emotionally Ready to Buy a Home?

Don't ignore the emotional factors when buying a home. You have to be ready to take on this large responsibility.

Do you see yourself staying put for at least five years?
It typically takes at least that long to come out ahead if you decide to sell the home. Selling it any sooner could leave you in the red.

Are you happy with your current job?
Changing jobs haphazardly isn't really an option once you take on a mortgage. You need job security and regular paychecks. If you're not working a stable job that you're happy with, wait on buying a house.

Can you manage your spending?
Once you sign your mortgage, you'll need to curb any impulsive spending. That may mean buying only what you can afford and cutting back on credit card use. If those things seem like torture, you may want to wait to buy a home.

Bottom Line

Do some soul searching to decide if you are ready for homeownership. Combine the financial responsibility and emotional considerations to help you decide.

Are you ready to commit? Do you have the finances, credit, and willpower to make it work? Answering these questions will guide you in the right direction.

More from CreditDonkey:

How to Save for a House

Should I Buy a House

What You Need to Buy a House


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