Buying a house is a major milestone in an adult’s life. If you’re at that stage, you may be asking yourself, “Am I ready to buy a house?” When it comes to emotional preparation, you’re the only one who can answer that question, but financial readiness is more objective.
Am I Financially Ready to Buy a House?
Home ownership is a big commitment, and not one that you should enter into lightly. If you’re wondering, “When am I ready to buy a house?” Use these indicators to assess your preparedness:
Sufficient Down Payment
Having down payment savings is an excellent sign of preparedness; It shows that you have the discipline and planning skills to get into the right financial shape. The amount you need to save depends on your loan type and price range, but a general guideline is to put down 20% of the purchase price to avoid having to pay private mortgage insurance (PMI) and get the most favorable loan terms. However, you can get a conventional loan with 10% to 15% down, an FHA loan with 3.5% down or a VA loan or USDA loan with 0% down. Keep in mind that the lower your down payment, the higher your loan amount and payments will be.
Closing Cost Reserves and Emergency Fund
Closing costs are often overlooked but typically cost between 2% and 5% of the purchase price. These costs must be paid at closing and can’t be rolled up into the mortgage itself. Set aside three to six months of expenses in emergency savings in addition to closing costs.
Manageable Debt-to-Income Ratio
Your debt-to-income ratio (DTI) determines what you can afford to spend on a house and whether lenders will approve your mortgage. DTI is a ratio of your total monthly debt payments and your gross monthly income (your income before taxes). Most lenders require DTI ratios below 45%, with lower ratios qualifying for better terms.
To calculate your DTI, add all your monthly debt payments, including your mortgage, car loans, student loans, credit card minimums, and personal loan payments and divide that total by your gross monthly income.
Strong Credit Score
When asking, “Am I financially ready to buy a house?” your credit score is a good indicator. A strong credit score means that you’ve handled debt responsibly in the past. Lenders use credit scores to determine if you qualify for a mortgage and what rate they’ll offer you. Conventional loans and VA loans usually require a minimum of 620, USDA loans look for a minimum of 640, and FHA loans are a bit more lenient at 580. Keep in mind that higher credit scores generally result in lower interest rates, so don’t aim for just the minimum.
Stable Employment and Reasonable Income
If you’re wondering, “Am I ready to buy a house?” you probably have a reliable income, but lenders look for a stable employment history of at least two years in the same field. Self-employed individuals need at least two years of tax returns showing that they have consistent income.
Long Time Horizon
For home ownership to be a smart investment, you should be thinking long-term, at least five years down the road. If you’re not sure where you’ll be living at that time or if you’ll be making major life changes, it might be better to wait until everything lines up.
Realistic Monthly Budget
Don’t let the dream of home ownership distract you from hard numbers. Calculate realistic figures for your mortgage payments, property taxes, mortgage insurance, homeowners’ insurance, and maintenance costs. Road test your new budget by seeing if you can bank the difference between that total and what you’re paying in rent right now. If you can manage that for a few months and it feels sustainable, the answer to the question “Am I financially ready to buy a house?” is “Yes.”
Am I Emotionally Ready to Buy a House?
If you’re financially ready, you’re well on the way to being emotionally ready. You’ve demonstrated that you’ve got the discipline and long-term outlook to manage the debt sustainably. However, if you feel pressured to buy a home or believe that it’s an expectation of being an adult, you may want to wait until it’s really right for you.
Some signs that you’re emotionally ready for home ownership are:
- You’re prepared to put in the time and effort that homeownership requires.
- You value stability over flexibility.
- You are excited about homeownership, even if you’re nervous about jumping in.
- You have realistic expectations about what home ownership entails.
- You’re interested in learning about things like how furnaces work, what it means to be a good neighbor, and how to clean gutters! You don’t have to be excited about those things, but you shouldn’t be averse to acquiring the necessary skills; they’re all part of the “joy of homeownership.”
There are normal fears and stresses that go along with buying a home. Those are not the same as being emotionally unready. If in doubt, talk to people who have been through the process before, and consult with your real estate agent, who will have guided many new homeowners through the process.
What to Do If You’re Not Quite Ready
If you’ve asked yourself, “Am I ready to buy a house?” and the answer is “I’m not sure,” Here are some steps you can take:
- Improve your credit score by always paying your bills on time, paying down your credit cards, avoiding opening new credit accounts, and disputing any errors on your credit report.
- Build your down payment fund by setting up automatic transfers to a dedicated savings account, reducing discretionary spending, putting the amounts you would have spent in a savings account, increasing your income with a second job or job change, and looking into down payment assistance
- Reduce your debt-to-income ratio by paying off high-interest credit cards first, increasing your payment on car loans and student loans, and raising your income.
- Stabilize your employment by committing to a position for two years, whether that’s your current one or a new one. Avoid career changes for the present.
If you’re asking yourself, “Am I financially ready to buy a house?” you’re thinking seriously about the possibilities. Home ownership is rewarding emotionally, socially, and financially, as long as you’re comfortable with a long-term perspective. Stay focused on your goals and you’ll be enjoying the benefits of homeownership before you know it!
