Last week we looked at two major lifestyle factors that influence whether you’re ready to buy a house today, or if you’d be better to put buying on the back burner for a while longer:
- Being committed to maintenance
- Being ready to tie yourself down for 5 or more years
These lifestyle factors are at least as important as the ones we’ll look at today—the financial factors—often because purchasing real estate, especially for the first-time buyer, can involve a lot of emotion. Yes, buying a house is—and should be—fun, but investing such a sizable amount of money, time and energy demands a certain level of objectivity too. That’s why assessing your lifestyle readiness is a smart first step.
Once you’ve assured yourself you’re committed to maintenance, and to a property, for 5 or more years, it’s time to look at the financial picture:
Financial Factor #1: Prepared for scrutiny?
Unless you’re able to put cash down on a house, you’ll need to be prepared for a complete financial assessment. Thais is the hurdle most people think of as they get ready to buy a house—and it’s an important one.
The key measures you’ll need in place:
- A stable employment history, at one employer for 2+ years
- A credit score of 500 or more — 620+ is better
- A debt-to-income ratio of 45% or less*
- Savings of 5-20% of the average home cost
- 2 month’s mortgage payments (or more) in reserve after all the closing costs are paid
- Reserve funds to cover any repairs, renovations and/or updates, if you’re planning to purchase an existing house (vs new construction) or flip the property.
If you give yourself the all-clear on these 5 (or come really close), consult a mortgage lender to see if they agree that you’re ready for pre-approval. If not, consider a financial coach, or become your own, before attempting to clear the last hurdle:
Financial Factor #2: Is it a favorable market?
There may be times in life when you just have to move—for a job, more space, less expense or other factors but, whenever possible, your best bet is to time your real estate transaction to the right market. If you’re getting ready to buy a house, choose a buyer’s market: when there are plenty of homes available, relative to the number of buyers. That’s when sellers are more likely to negotiate on price.
In addition to the overall market condition, you’ll want to assess areas within your local market that may be more favorable: up-and-coming neighborhoods, planned developments, mixed zoning, and other factors that could influence both location and timing. Your real estate professional is in a good position to help you assess whether it’s a favorable market for the type of real estate purchase you’re considering.
If all four areas look positive, then the odds are good you’re ready to buy a house. Do you have questions? Need help or advice on when and how to prepare? Find out how we serve Triangle-area buyers. We’d be happy to help. Just contact us.
*to calculate your Debt-to-Income ratio, add up all your monthly debt payments—credit cards, car loans, school loans etc—and divide that by your monthly income. Multiply by 100. Do you get a number under 45? Great! No? Pay off some debt before you apply for a mortgage.