Deciding whether to buy a house is one of the most important financial decisions you’ll ever make. Owning a home is a great way to build equity and increase your household wealth – and it’s also a big responsibility. It’s important to consider all your options before you buy.
Deciding to buy a house takes confidence in your financial situation and knowing what kind of lifestyle you want.
You may see a home that makes your heart scream, “Go on, buy it!” But your head demands proof you’re not about to blow up your budget.
Go with your head. The better financial position you’re in when you buy a house, the less stress you’ll feel and the happier you’ll be with your purchase.
You probably have questions about the process that happens between deciding to buy a house and deciding where to put the leather loveseat in your new living room. And we’ve got answers!
Let’s explore the possibilities and help you align the demands of your heart with the questions (and precautions) swirling in your head.
Should You Buy Now or Wait? 9 Questions To Ask Yourself
There’s no stock answer to the question of when to buy a house. But here are some questions you should ask yourself before you decide:
- Is the current real estate market right for you to buy a home?
- If the market is a seller’s market, will finding an affordable home be more challenging?
- If you buy now, will your home gain or lose value over time?
- Are you in a place in your life and career where you can settle down for a while?
- Is your financial situation stable enough to qualify to buy a home?
- What will your debt-to-income (DTI) ratio and credit score look like to potential lenders?
- How much can you afford to spend on a down payment?
- Does it make more sense to buy a condo or a single-family home?
- Will you have enough money to cover all the costs of being a homeowner?
Let’s see what your answers say about your readiness to own a home.
Is It the Right Time for You?
Depending on your lifestyle, financial situation and how long you plan to stay in one place, buying a home can be a better investment than renting.
If you stay in your home long enough, usually around 5 years or longer, you can build up a good amount of home equity (the difference between what you owe and what your home is worth).
If you sell your house after less than 2 years, you could owe extra taxes that would eat into your earnings from the sale – and we’re talking thousands of dollars.
Consider where you plan to be in life
Before you buy, it’s a good idea to take stock of your life and your lifestyle.
- Where do you see yourself or your family and career in 5 years?
- Will you need to move for work or any other reasons?
- Are you planning to buy a home on your own or with a spouse or partner?
- Are you having children or planning to have children? Would you send your child to the schools in the area?
Can You Count on Your Income?
Mortgage lenders love it when their borrowers have steady, reliable incomes.
If you don’t see yourself staying in your current job much longer or you’re thinking about changing careers, it may make sense to wait and see how much your income changes before committing to a mortgage.
Taking some time to save money might make sense if there are questions about your future income. TBH, waiting and saving is better than stressing out trying to make ends meet or staying at a job you don’t like so you can pay your mortgage. And here’s another bonus of waiting: It gives you more time to save for a larger down payment.
If you’re curious and want to estimate monthly mortgage payments, use our mortgage calculator to run some numbers.
How’s Your Debt?
Your debt-to-income (DTI) ratio and credit score can affect whether you get approved for a mortgage loan and the loan terms lenders offer. It’s common knowledge that lenders prefer a low DTI. Fixed monthly debts can include:
- Rent or mortgage
- Car loans
- Credit cards
- Personal loans
- Student loans
DTI requirements will vary from lender to lender, but lenders typically prefer a DTI under 45%.[1] A healthy DTI is a promising step toward loan approval. The lower your debt, the better loan terms lenders may offer – and that includes lower interest rates. (FYI: You can calculate your DTI with our DTI calculator.)
Having some debt isn’t necessarily a deal breaker. And you can even work around student loans.
But if your DTI is high and you’re worried about piling a mortgage on top of your bills, it’s okay to step away from your bookmarked real estate websites and work on paying down your debt.
How’s Your Credit Score?
Lenders will look at your credit score. The score (a three-digit number ranging from 300 – 850) measures how reliable you are at paying back debt (also known as your creditworthiness).
Most of us get a credit score from the three major credit agencies, TransUnion®, Equifax® and Experian™. The closer your score is to 850, the better your credit is. For most conventional loans, you’ll need a minimum credit score of 620.
The higher your credit score is, the lower your mortgage interest rate is likely to be. Basically, it’s cheaper to borrow money when you have a high credit score. You could save tens of thousands of dollars in interest over a 15-year or 30-year mortgage.
If your credit score falls below 620, there are still loans you can apply for. You may qualify for a Federal Housing Administration (FHA) loan. Borrowers with credit scores of 580 or higher can qualify for an FHA loan with a 3.5% down payment. If your credit score is between 500 and 579, you’d have to make a 10% down payment.[2]
FHA loans typically charge more in interest, and they require mortgage insurance premiums (MIPs) even if you can make a 20% down payment on the home.
If your credit score doesn’t meet the qualifying threshold of the loan you’re interested in, take some time to improve your score by paying down debt – especially high-interest credit card debt.
What Size Down Payment Can You Afford?
While you’re figuring out how much to put toward your down payment, you should also be thinking about other costs you’ll be paying around the time of purchase, like closing costs, moving costs, utility deposits, etc.
After you factor in these additional costs, will you have enough money left over to comfortably afford a down payment?
You don’t always need a 20% down payment to get a mortgage loan. With good credit, your down payment can be as low as 3%.[1] And remember, if you have a credit score at the lower end of the spectrum, you may be able to put down 3.5% with an FHA loan.[2]
But, the closer you get to the industry-recommended 20% down payment, the more likely you are to enjoy:
- A smaller loan
- A lower mortgage rate
- No private mortgage insurance (PMI)
- Less interest paid over the life of the loan
- An edge over other buyers in the eyes of the seller
If you want to make a 20% down payment but you’re coming up short, ask yourself if it’s worth it to buy now or give yourself some breathing room and cash reserves to comfortably spend on a house later.
If you’re determined to buy now and your main money hurdle is the down payment, consider asking friends or family to pitch in with gift money to help cover it. And ask your lender to explain the rules around gift money.
How Much Should You Save To Buy a House?
Homeownership costs a lot more than the price tag on the house you love. You should keep several other major expenses in mind, including:
- Homeowners insurance
- Property taxes
- Closing costs, titles
- Moving costs
- Bills for utilities and internet
- New furniture and appliances
- Necessary renovations and improvements before you move in
- Maintenance, including landscaping
If you live in a condo or a home that belongs to a homeowners association (HOA), remember to add your monthly HOA fee to the list.
What you pay in property taxes will depend on where you live. It is not uncommon to encounter property taxes that are more than 2% of your home’s value per year.
Let’s do some math on a fictional home. If you bought a $400,000 house and your area’s property taxes are about 2% of your home’s value, your property taxes would cost you $8,000 per year, or 666.67 per month.
Fortunately, one of the perks of homeownership is that a portion of your monthly payments will be “returned” to you as home equity. Additionally, you will typically benefit from an overall increase in your home’s value.
Be generous when you’re creating a budget that factors in the cost of home buying and homeownership.
How’s the Real Estate Market?
If you want to buy a house right now, you need to think about timing and location.
Home prices go up and down based on everything from the time of year to the local housing market to the state of the global economy. These forces can affect everything from the price and availability of homes to mortgage interest rates.
Buying a home in 2022
The housing market has experienced a lot of significant changes over the past few years. Home prices have skyrocketed due to high demand and a low supply of available houses.
The combination of the housing shortage and rising interest rates is making it more expensive to buy a home now than at the beginning of the pandemic when mortgage rates were at historic lows.
And depending on how markets change, current home prices might end up creeping even higher.
Consider the best season for home buying in your area
In most real estate markets, demand tracks with the season. In the Northeast, for example, buyers tend to be more active during the spring and summer. And that makes sense. The days are warm and long, and it’s easy to get around and attend open houses. Fast forward to the fall and winter, when buyers tend to hunker down and stay indoors. The days are short and cold, and icy roads can make looking at homes unappealing.
Look farther south, and you might see the opposite. The demand for homes may spike in January and February as buyers from the Northeast look for warm homes where they can escape the winter.
Watch interest rates
Lenders charge mortgage interest rates (think: what a lender charges you to borrow money) based on current market interest rates. When market interest rates are low, mortgage interest rates usually are, too.
Explore the local housing market
If you’re looking to buy in a popular neighborhood, you may have a hunch that home prices and values will rise in the future. That may be true, but that also means the housing market in the area might be ultracompetitive. If that’s the case, prices will probably be higher, making it harder to find an affordable home.
On the flip side, if you find an area with lots of homes for sale and not enough buyers, it could be a sign the area is in decline. You should approach buying a home in areas where home values are falling with caution.
While you could negotiate a lower price for a home, the value of your home could continue to drop and make it harder to sell in the future.
Still Wondering When To Buy a House?
Check out these yes or no questions. See if the right choice for you is to buy a house right now or when the time – and your money – is right.
- Are you looking to buy in an area where your home will build value over time?
- Will your career and/or family life let you commit to a location for 2 – 5 years?
- Do you have good credit and a healthy balance of debt and income?
- Can you afford a 3% down payment?
If you answered yes to all our questions, congrats! It looks like you could be on your way to owning a home.
But before you formally bid rent farewell, start your home buyer’s journey with these steps:
- Research mortgage lenders to see about getting preapproved
- Set up a few chats with real estate agents
- Talk to a financial advisor or debt counselor about improving your finances
- Learn more about first-time home buyer programs and down payment assistance programs
- Figure out if you’ll need to ask family and friends for gift money to make a down payment
Buying a home is a huge milestone that, honestly, many of us aspire to. But it shouldn’t come at the cost of anyone’s financial health and financial goals. Waiting to buy a home until you’re financially ready can potentially save you thousands of dollars – and it won’t cost you your peace of mind. It should increase it!
Signs You Should Wait To Buy a House
Being a homeowner has many distinct benefits, but that doesn’t mean you should purchase a home before you are ready. If you are too aggressive and enter the market before you are prepared, you may risk becoming house poor and facing a new set of financial challenges.
And remember, while you may qualify to buy a home, it doesn’t necessarily mean it is the best idea. If you are struggling to pay your bills or meet financial obligations, it might be a good idea to wait.
So, should you buy a house? Only you (in consultation with any loved ones) can answer that question. And your answer should be steeped in honesty – honesty about your future goals, what your finances look like and your credit profile. Your heart must listen to your head. Of course you want to fall deeply in love with the home you purchase, but to maximize the home’s full potential – and joy – you’ll need to be able to afford it, too.
The Short Version
- Deciding to buy a house takes confidence in your financial situation and knowing what kind of lifestyle you want
- Your debt-to-income (DTI) ratio and credit score can affect whether you get approved for a mortgage loan and the loan terms lenders will offer you
- You don't always need a 20% down payment to get a mortgage loan. With good credit, your down payment can be as low as 3%
Fannie Mae. “ELIGIBILITY MATRIX.” Retrieved June 2022 from https://singlefamily.fanniemae.com/media/20786/display
U.S. Department of Housing and Urban Development. “Section C. Borrower Credit Analysis Overview.” Retrieved June 2022 from https://www.hud.gov/sites/documents/4155-1_4_SECC.PDF
