Homeownership is a major life milestone. Not everyone arrives there at the same time, but many are working toward it as a major financial goal.
In recent years, an increasing number of younger Americans have crossed that threshold. According to CoreLogic, 54 percent of home-purchase applicants in 2022 were millennials. Every year, more young people decide they are ready to take on the significant responsibility of homeownership.
Yet, buying a home isn’t without its hurdles, especially in today’s economy. Home prices jumped 10.2 percent between 2021 and 2022, according to the National Association of REALTORS, and mortgage rates are at their highest in a generation, per FreddieMac. Shifts like these can leave you wondering when you will be ready to buy a house — if ever.
Here are five signs that may help you answer “Yes” to the question, “Am I really ready to buy a house?”
1-Your credit and finances are in good shape
Buying that first home is a major step. If you don’t have your financial house in order, you probably aren’t ready to handle the responsibilities of owning a real house.
With that in mind, there are three financial boxes you should check before you pursue homeownership.
Your debts are manageable: Lenders consider all your debts when determining your loan eligibility and terms. They’ll look at your debt-to-income ratio (DTI), which measures your total monthly debt payments divided by your monthly gross (pre-tax) income. Usually, you’ll need this number to be below 36 percent (including mortgage payment), but lenders may accept 45 percent if you have good credit and strong cash reserves.
You have a savings cushion for emergencies: Home ownership is unpredictable, and there’s no landlord to rescue you when an appliance breaks down or your basement floods. As a rule of thumb, it’s a good idea to have three to six months of cash on hand for home repairs and other emergencies.
Your credit score is in a good spot: Your credit score, which rates how well you’ve done at managing debts, is a key factor for lenders. You may be able to qualify for a government mortgage, such as a Federal Housing Administration (FHA) loan, with a lower score, but you’ll typically need a score above 620 to qualify for most conventional loans. The higher your score, the better your loan rate and terms.
2-You can afford a down payment
Although the above financial milestones make up the foundation of homebuying readiness, they’re not the only financial considerations you should make. The next factor to weigh is your down payment or the cash you’ll put toward the home price.
It’s no longer a hard-and-fast rule that you need to put down at least 20 percent to qualify for a mortgage. It’s possible to qualify for some conventional loans with as little as 5 percent down, and FHA loans can require as little as 3.5 percent down.
That said, a larger down payment will put you in a better financial situation. You’ll usually secure the best interest rate and avoid paying private mortgage insurance (PMI) if you come up with 20 percent down.
3-You can handle the monthly payment
As a homeowner, your monthly expenses include not only the standard principal and interest on your loan payment but also property taxes and homeowner’s insurance. Those last two items are usually lumped in with your monthly payment and known together as PITI. If you had to purchase mortgage insurance, that will be added to your payment too. You also need to consider utilities and maintenance.
All in all, most financial experts recommend limiting your total housing expenses to no more than 30 percent of your gross monthly income. This is a good target to shoot for before you start the house hunt.
4-You’re ready to stay put for a while
Life stage plays an important part in homebuying readiness as well. Buying a house and securing a loan come with significant costs that you don’t need to worry about when you’re renting. In general, you’ll pay between 2 percent and 6 percent of your home’s purchase price in closing costs, which include loan-origination fees, agent commissions and more.
To recoup these costs, it’s important to stay in your home for a while. If you can commit to owning the home for at least five years, you’ll usually offset your upfront costs and begin to reap the financial rewards of homeownership. Usually, it’s best to wait until you’re settled into a job or making a significant life move, such as starting a family.
5-The market makes some sense
Finally, there’s the part you can’t control: the market. Nationally and locally, the housing market fluctuates back and forth in favor of buyers and sellers. Sometimes it’s easier to buy than others, and sometimes housing prices, interest rates and inflation make buying more challenging.
If you’re in a good position in the first four areas we’ve discussed and it’s a buyers’ market, then it may be the perfect time to buy. If prices are skyrocketing in your area, it might be a good time to wait for things to cool off so you can get a better deal. Ultimately, though, it’s important to weigh all five of these factors together so you can decide whether a home purchase makes sense for you.
If you’re ready to start your homebuying journey, Briggs Freeman Sotheby’s International Realty can help. View our latest listings to start the adventure!