black and white keys reflecting decision: should I buy a house?

Should I Buy a House? 9 Keys to Confidence: A MoneyTips Guide

tl;dr

What You Need To Know

  • Buying a house is a big life decision – make it a great one by thinking through the money side of it
  • Having a steady income and 3-6 months of emergency savings can help you get a loan and be a happy homeowner
  • You don’t need to drop a 20% down payment on a home loan – it can be as low as 3% with good credit

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Knowing when to buy a house comes down to two key things: how bad you want it and if you’re financially prepared.

Here’s the common scenario: Your heart says, “Go on, make the dream real,” but your brain is demanding proof that you’re not about to blow up your budget.

It’s smart to be thinking that way. The better position you’re in when you buy a house, the less stress you’ll feel and the happier you’ll be with your purchase in the long run.

So, let’s talk about it.

1. Can You Count on Your Income?

Needless to say, steady, reliable income plays a huge role in getting approved for a home loan. Mortgage lenders love to see that as they’re reviewing your application.

But you should also take an honest look at your income situation as a potential homeowner. Does it inspire you with confidence or make you pause?

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Your job rocks. And your boss thinks you’re a rock star. Enjoying your job and feeling confident that you’ll be there for a while are two good signs that it may be time to buy a house.

Here’s something else to consider: Is there a chance you’ll get a raise soon? Waiting until then could help you get a better mortgage rate (which in turn will save you a lot of money) or be able to afford a house you’ll be more comfortable in for longer.

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If you don’t see yourself staying in your current job much longer (we’ve all been there), consider waiting to see how that shakes out before committing to a mortgage.

Waiting longer to buy a house might be tough emotionally, but so is stressing over making ends meet or staying at a job you don’t love just to pay your mortgage.

Want to know if your current income could cover the average homeownership costs in your area? Ask a local real estate agent what they are. 👍🏽

2. How’s Your Debt Looking?

A low debt-to-income (DTI) ratio is a beautiful thing to a mortgage lender.

Exact requirements differ among lenders, but they’ll usually want your DTI to be under 43%.

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Having a healthy DTI is a good step toward loan approval. And the lower your debt, the better your loan terms could be, including a lower interest rate.

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If you’re worried about your debt, don’t despair, it isn’t necessarily a deal-breaker. You can even work around student loans.

If your DTI doesn’t look great on paper, but you have faith in your ability to make your mortgage payments, shop for a lender who does, too.

If you’re not so sure that you want to pile mortgage debt onto the debt you already have, we appreciate your honesty! Consider paying it down before looking for a house.

3. Credit Score … High-Five or Too Low?

The higher your credit score, the less expensive your loan will be for any given home’s purchase price.

How so? If your loan has a lower interest rate because your credit score was higher, you’ll end up paying less interest each month. Over the full course of a 15- or 30-year mortgage, this could mean you’d save tens of thousands of dollars.

Yes, you heard me right. What would you rather do with that money than pay for interest?

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If your credit score ranks as “good” or “excellent,” lenders are more likely to trust you as a borrower and offer you a lower rate. Feels good, doesn’t it?

Now may be a good time to shop around for a loan preapproval.

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You’re far from alone if your credit score is “average” or lower. Been there.

Credit scores don’t reflect who you are as a human (even lenders know this). There are plenty of ways a credit score can sink — but plenty of ways to lift it, too.

And keep in mind that you could still be eligible for a mortgage without being a credit score expert. Just be wary of sneaky lenders trying to take advantage of your situation. Look for legitimate options such as an FHA or VA loan through a lender with insanely good (and verified) Google reviews.

4. Are You Building an Emergency Fund?

If you’re calculating how much to save before buying a house, go beyond the usual things, like down payment, closing costs and moving costs.

Include an amount you’d like to keep separate for financial emergencies once you’re living in your home.

As a homeowner, more money in the bank means less risk and stress. If your furnace dies, you don’t want to have to decide between huddling under 10 pounds of blankets until March or going into debt to buy a new furnace.

So what should your emergency fund look like? After the cash you need to buy your house comes out of savings, aim for 3 to 6 months’ worth of living expenses in there, including enough for your monthly mortgage payments.

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Not gonna lie, that’s impressive if you’ve got enough money to buy a house and keep a healthy chunk of savings at the same time. Not a lot of first-time home buyers can pull that off.

Now, depending on the age and upkeep of the houses you’re looking at, consider saving more. Your future self will appreciate you for being so on top of your money game!

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When buying your first home, it can be tempting to stretch your finances thin to get over the homeownership hump. A lot of times, anything even closely resembling an emergency fund is the first thing to go.

Just remember to reality-check yourself about those unexpected repairs and other big expenses that often pop up during the life of a mortgage. And, yeah, it’s always when we least expect them or really need to be spending our money on something else.

5. What Size Down Payment Can You Afford?

When figuring out what you can put toward your down payment, factor in other costs that you’ll need to pay around the time of purchase, like closing costs, movers, utility deposits, etc.

And don’t forget that emergency fund!

After you’ve added that stuff up, do you have enough savings left over for a down payment that is at least 3% of the price of the home you’ve budgeted for?

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Most lenders can require as little as 3% down for a conventional loan and 3.5% for an FHA loan, but the closer you get to the ideal — 20% down — 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

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If you’re scraping together a minimal down payment, is it worth it to buy a house now? Or should you wait until you can save enough to give yourself more breathing room?

If you’re dead set on getting a home now and your only serious money hurdle is the down payment, consider asking (or … maybe begging) someone close to you for “gift money” to help cover what you need. Your lender can help explain the rules around gift money ahead of time.

6. Are You a Wanderer?

The large financial commitment of owning a house can keep you rooted for a while. If your dream home isn’t an RV or a tiny home on a trailer, keep reading.

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If you love your area and have strong ties to it, like family, friends, your career, or an area-code tattoo you can’t cover up, owning a house there is an easier choice to make.

And it can be a good investment versus renting. Stay there long enough, and it’s possible you could build enough home equity (the amount you own beyond what you still owe) to offset what you’ve spent buying and owning it.

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Not all of us can take one place for too long. Do you get itchy after living somewhere for a while?

Selling your house soon after buying it could negate any value you’ve gained in home equity.

For example, if you sell your house before you’ve lived there for 2 years, you could owe extra taxes that eat into what you’ve earned from the sale – we’re talking thousands of dollars. Not the end of the world, but not fun, either.

Where do you see yourself or your family in 5 years? Where do you see your career? How might getting a mortgage now impact all of this? 💭

7. How Handy Are You?

No matter when a house was built, it’s going to need maintenance at some point.

Could be sagging floors in an old Victorian, a leaky roof on a mid century ranch or a wet basement in a brand new house. There’s always something (said in grumpy-old-man voice).

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You’ll be in a more comfortable financial position over the course of owning your house if you can DIY like a champ.

Knowing how to fix things around the house or yard can help you make the most of your home purchase. Consider yourself (and the occasional YouTube tutorial) insurance on your investment.

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Some of us don’t have the passion, training or time for home improvements. Real talk.

But that does mean that every time something breaks or needs to be remodeled, someone else’s labor is going to need to be paid for. So make sure you’ll have room in your monthly budget for hiring repair technicians when needed.

8. How’s the Housing Market There?

Is it worth it to buy a house now? Timing and location could play a big role in answering that.

Why? Home prices go up and down depending on the time of year and wider societal factors (I’m talking to you, lumber prices). And the overall popularity of where you live could make the difference between whether your house has any value years from now or not.

So ask yourself: Is the housing market hot or cold where you’re looking? Are more people moving to your town than away from it?

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Real estate agents in your housing market and websites like Rocket Homes can help you get an idea of where home values are predicted to go in your area.

Rising values mean there’s a good chance that owning a house there can help you make money off it if you sell it someday. But it can also make buying now tricky. You’ll want to find out what the best time of year to buy in your area has traditionally been, as well as any recent real estate trends there.

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If the property values where you’d like to live are expected to decline for a long time, you might want to consider an option B, even if it’s renting for a while.

Concerns about long-term property value shouldn’t necessarily rule out buying a home there. Maybe the rental market there is overpriced compared to home prices, or maybe you don’t care where your dream house is and your top priority is just relaxing on that beautiful front porch.

9. Do You Feel Ready, Like, Deep in Your Bones?

When deciding if you should buy a house, a little gut can go a long way.

If you feel ready to say goodbye to renting, your next step could be a casual chat with a mortgage lender or real estate agent.

Remember, you don’t owe an agent anything upfront. They’re used to consulting potential clients who aren’t sure if they’re ready yet. But be warned — even if you don’t proceed with a house hunt, you may get a holiday card from them.

In general, never feel pressured to buy a house. Don’t force it if waiting a while could help you feel more comfortable both financially and emotionally.

Consider the pros and cons of buying a house, and talk to people you trust.

#icymi

In Case You Missed It

Take-aways

  1. Deciding to buy a house takes confidence in your income and general stability — no one wants to stress over mortgage payments
  2. Your debt-to-income ratio and credit score don’t just have a say in if you’ll get a loan, they also help determine how good of a loan you’re offered by the lender
  3. As you’re figuring out how much to save before buying a house, don’t forget what you might need leftover in savings after closing

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