How To Tell You Are Actually Ready To Buy A Home
Owning a home is something that many millennials dream of, but simply assume is out of their reach. This is especially true thanks to the crippling amount of student debt many have hovering over their heads, making home ownership seem nearly impossible to an entire generation. Yet, for the resourceful ones with little or no student debt and a stable job, becoming a homeowner is completely possible.
Before you start searching on Zillow and finding your dream home, you need to do a serious evaluation of your situation and make sure you are ready, both financially and mentally, for home ownership. Buying a home is a long journey, so being ready at the start can prevent a lot of heartbreak and frustration. Here are some of the many things you have to consider to make sure you are ready to buy a house.
How Financially Stable Are You?
Buying a home is a long term, financial obligation. Yes, you can potentially get out of it by selling the home, but it’s not like renting an apartment, where you can leave once the contract is done. It is your responsibility to make sure that your mortgage gets paid.
So, before buying a home, you need to ensure you are financially stable. The biggest part of that is having a steady income from your job, and ensuring that you won’t be losing that job (or be completely out of work) in the foreseeable future.
Before pre-approving somebody for a loan, many mortgage lenders will inquire about how long a person has been at a job, and will research what kind of turnover that career typically has. If you just started at a company, it’s more likely you’ll be the one to go if layoffs are to happen.
If you are self-employed, you’ll need to prove, both to yourself and lenders, that your business is stable and can provide a long term income.
What is Your Debt to Income Ratio?
Before deciding to take on the extra debt of a mortgage, you need to make sure that you have a good handle on any existing debt. To figure that out, add up all of monthly payments you make on current debts and then compare it to your monthly income. How much of a percentile of your income must go to current debts?
Typically, lenders won’t go over a 43 percent debt ratio when considering a mortgage loan. That 43 percent includes how much you would be paying for the mortgage loan, alongside other debts you might have. Common debts people have include car payments, outstanding credit card payments, and student debt.
The lower your debt to income ratio, the more likely you will qualify for a loan and could even lead to better interest rates on a mortgage loan. If you have a substantially high debt ratio, if might be worth putting off buying a home and instead focusing on paying off current debts.
Having a low debt to income ratio might not be the best personal indicator that you are ready, though. All this number takes into account is outstanding debt, not regular bills like utilities, food, clothes, or other expenses.
What Is Your Credit Score?
A credit score is a way for financial companies to measure how reliable and financially stable a person is. Your credit score can go down when you fail to pay a bill, and can increase by making payments on time and being responsible with credit card debt.
There are multiple companies that measure credit scores, each with their own qualifications, but in a broad sense, the average credit score is in the 600s. A large portion of whether your credit score is good or bad depends on how much debt you currently have, and if you have a history of paying bills on time.
A lower credit score could lead to difficulties obtaining a mortgage loan, or result in unfavorable interest rates. Some lenders might even reject an applicant completely because of a low credit score. On the other hand, a high credit score could lead to lower interest rates, or benefits like not having to supply a down payment.
It’s possible to check your credit score through your bank or contacting the credit bureaus directly. If you do have a lower credit score, make plans to improve it so you can receive those benefits that come with high credit. If you aren’t quite ready and need to increase your score, visit our credit score resource and learning center for guides and tips.
Have You Saved Up For A Down Payment?
Your savings are going to play a pretty large role in buying a home. Being able to provide a good down payment can help lower your total monthly payments, and can have an impact on how much interest you have to pay in the long run.
Some mortgage lenders require 3 percent of the total value of a home as a down payment, but might require an even larger amount if a person has poor credit. People with poor credit might have to pay a 5 percent, 10 percent, or even 20 percent down payment. On the other hand though, people with excellent credit might be able to do away with a down payment entirely in exchange for higher monthly payments.
Don’t Forget The Extra Payments, Fees and Taxes
There is more to buying a house than just monthly payments on the mortgage loan. There are additional taxes, fees that have to be paid during the buying process, and regular payments to organizations like HOAs.
As you budget out to see if you can afford a home, don’t forget to include these additional costs. While these fees are generally smaller and won’t dissuade you from buying a home, they can be a nasty surprise if they aren’t expected. Be sure that before you start the home buying process, you have enough cash available to pay for any fees that might arise. This might ultimately mean putting off looking for a home another month in order to save accordingly.
Are You Ready To Settle Down?
Buying a home is traditionally a longer term obligation and investment. Yes, people do move after buying a home, but you lose a level of flexibility that is provided by renting. If you are just renting a place, after your contract is up, you can pull up stakes and move anywhere really. Tired of living in a specific neighborhood? Just find a new place. Want to live closer to your favorite restaurant? It’s pretty easy to do that.
Buying a home means staying in an area for a longer amount of time. If you are happy with the town or city you are currently living, then buying a home makes sense. But if not, if you see yourself moving in the future, or even are unsure about where you want to end up, don’t get a home.
Can You Take Care of Your Home?
Buying a home isn’t just a monetary investment, it’s a time investment too. When you rent a place and something breaks, you can call upon the landlord to fix it. If something breaks in your home though, it falls to you to repair it. That means either having the skills to repair things, or being able to pay for somebody to do it for you.
It’s not just fixing stuff either. Owning a home requires quite a bit of maintenance. This includes taking care of a lawn, shoveling a driveway if it snows, and taking care of smaller things like changing air filters.
A decent chunk of time is going to be spent on home maintenance. If that is something you absolutely don’t want to do, home ownership might not be for you. If you want to get more money than you initially spent when it comes time to sell your home, improving, updating and fixing your home is a must.
Do You Actually Want A Home?
Do you actually want to buy a home, or are you only doing it because it’s expected of you, or your parents are pressuring you to move on to the “next big stage of life?” Buying a home is a big responsibility, and if you don’t want it, there is nothing wrong with that.
But if you do want it, if you are passionate about owning a home, know that it is possible for Millennials to do it. Just make sure before you jump in, that everything is in order. This includes your credit, your finances, your income, and your mentality are all ready to make the step to becoming a homeowner.
Image source: https://pixabay.com/
Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.
This post was updated December 20, 2017. It was originally published June 9, 2017.