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How to know when you're ready to buy a house

Maybe you've been considering homeownership for a while, or perhaps you haven't given much thought to buying at all. Either way, it’s important to know when you’re financially ready to buy a house

Lenders want you to be financially stable before applying for a home mortgage. But do you know what financial stability looks like? Once you understand what you need to have in place, homeownership may be more realistic than you thought. Here are five key points to think about when considering whether you’re ready to buy your first home.

1. You have dependable income

Regular, dependable income is critical to qualifying for a mortgage. A home is a long-term investment, so lenders take a close look at your income and employment history. 

Income that doesn't support a mortgage payment can hurt your chances to qualify for a mortgage. Frequent job changes suggest instability and can also prevent a lender from approving a home loan. If you're new to working and still aren't earning enough, you might need to wait before pursuing homeownership.

If you’re not sure if you earn enough to make monthly mortgage payments, use a mortgage calculator to work up some estimates.

2. Your debt-to-income ratio is low

Lenders look at your debt and your income to determine if you’ll be able to manage your monthly mortgage payments without issues. Your debt-to-income ratio (DTI) is the percentage of your monthly debt compared to your monthly gross income. Credit card payments and loan payments and the payments on your new home are examples of the debts lenders include in your DTI calculations.

Lenders are concerned about the relationship between your income and how much you owe creditors. Your DTI should ideally be below 40% when you include your proposed mortgage payment. Some lenders have stricter requirements. The lower your debt in comparison to your income, the better chance you have of qualifying for a mortgage.

If you have limited debt compared to your income, you’ve fulfilled one crucial requirement for being ready to buy a house. If you’re still working on paying off debts like student loans or credit card payments, it may be worth focusing on reducing your DTI before considering buying a home.

3. You have a good credit score 

Your credit score is a three-digit number that represents your creditworthiness. Credit scores typically range from 350 to 850 with higher numbers representing better credit. Your credit score is calculated with information from your credit report, including payment history, debt and the length of your credit history.

Having a good credit score is a key piece to being financially stable enough to buy a home. Also, those with high credit scores typically get better terms for their home loan, which can save thousands of dollars over the life of a mortgage. Having an excellent credit score puts you in a great position to become a homeowner.

If you have poor or fair credit, you need to evaluate your credit score and may need to work on improving it before you’re ready to buy a house. Look for items that might be negatively impacting your score, such as too many hard credit inquiries, too short of credit history, late payments and using too much of your available credit.

If you have a low credit score, you’ll have difficulty qualifying for a mortgage. Some affordable home lending products, FHA loans and VA loans may have lower credit score requirements than conventional mortgages, which could help you qualify for a loan even with less-than-perfect credit.

4. You have enough saved for a down payment

down payment is an initial partial payment you make when you purchase a house. The larger the down payment, the more likely you may be approved for a mortgage.

If you don’t have enough available for a large down payment, you might be able to be gifted money to put towards it. If a large down payment still sounds steep, you might have other options. Speak to your lender about state and local homebuyer assistance programs that subsidize a portion of the required down payment.  Also, look into lower down payment products such as FHA or some Conventional loans that may offer less than 5% down payment options in some cases.

5. You can cover the additional costs of buying a home

When you think about buying a home, many only think about their down payment and monthly mortgage payments. But buying a home carries additional costs you need to factor into your budget. Some of these costs are one-time expenses that you won't have to think about again, while others need to be paid regularly.

The most common home buying costs you need to prepare for include:

  • Closing costs. You pay these costs when you close on your home. Common closing costs include fees for the appraisal, inspection, title search and a credit check. Your lender will give you an estimate of closing costs soon after you apply for a mortgage. To reduce closing costs, you may be able to negotiate to have the seller pay some or all of them.
  • Private mortgage insurance (PMI). Private mortgage insurance is a monthly expense that protects your lender if you default on your loan. Having to pay PMI depends on the amount of your down payment. Typically, if you put 20% or more down, you don’t need to pay PMI. 
  • Property taxes. When you close on a new house, you typically need to pay property taxes. This amount is from the date you close through the end of the tax year. Most lenders roll your property taxes into your monthly mortgage payment and hold your money in escrow until it's time to pay property taxes to the county where you live.
  • Homeowners Insurance. Most lenders require you to have an insurance policy that protects your property against loss from things like theft and natural disasters. Typically, your annual premium is spread out over 12 months and included as part of your monthly mortgage payment. Similar to property taxes, your lender then pays your annual insurance premium on your behalf using the funds held in your escrow account. 
  • Homeowners Association fees. Houses located in specific neighborhoods or gated communities sometimes have homeowner's associations (HOA). Almost all condominiums and townhouses have HOAs. When you belong to an HOA, you pay fees for the services and amenities the association provides. The amount and frequency of HOA payments varies.

6. You have savings to cover maintenance and repairs

Owning a home means you’ll have to maintain your property. While you may have enough to purchase a home, you’ll need to make sure you can also cover the costs of owning one. Many realtors and insurance companies recommend following the one-percent rule. Tuck away one percent of the value of the home you intend to buy each year to cover maintenance and unexpected repairs.

Am I ready to buy a house?

Ultimately, your lender will use your income level, employment history, debt-to-income ratio, creditworthiness and down payment amount to evaluate how much house you can afford. Talk to a Home Lending Advisor for help understanding how to become a homeowner or prequalify for a home mortgage.