Should I Buy a House?

See If You’re Ready to Be a Homeowner

“Should I buy a house?” This is one of the most important questions of your financial and personal life.

Purchasing a house could help you on the path to financial success, as American homeowners (on average) are 43 times wealthier than renters, according to data from The Survey of Consumer Finances. On the other hand, homeownership could cause you a lot of financial and personal stress if you aren't ready.

To help you make the right choice about when to buy a house, check out this guide to find out eight key things you need to consider.

1. Your Current Financial Health

You shouldn't buy a house until you are in a good financial position to both qualify for a mortgage loan at a good rate and to comfortably afford your monthly payments and the total costs of homeownership.

Key financial factors that affect your readiness to buy a home include the following:

• Credit score: Your credit score is a number between 300 – 850 that represents your financial history based on your credit report. The higher the credit score, the better. Lenders use your credit score to help them qualify you for a loan and even determine what interest rate is available to you. If you have a lower score (below 550), you might want to wait until your score improves to buy a home.
• Existing debts: Lenders review your debt compared to your income to make sure your payments will be affordable. If your monthly debt, including the payment on your new home loan, is above 36% of your gross income, you may want to work on paying some of your balances down before you borrow.
• Current income: Having a steady income is critical to qualifying when you apply for a mortgage. Lenders usually must verify mortgage applicants have been earning a consistent paycheck for at least the last two years.

If your finances aren't in a good place, then buying a house should be secondary to improving the situation.

2. Mortgage Interest Rates

Most people need a mortgage when buying a home. When you get a mortgage, the loan's interest rate has a major impact on what your loan will cost.

For example, if you borrow $400,000 at 5% interest using a 30-year loan, your monthly payment would be $2,147.29. If you borrow at 7%, the monthly payment would be $2,661.21. The interest rate change adds around $514 to your monthly payment, or $6,167.04 per year, or $186,120 over the life of the loan.

Your personal financial credentials will influence the mortgage rate you qualify for, based on current market rates. The better your credit score, the better rate you’ll enjoy on your mortgage. You can use our mortgage affordability calculator to estimate your loan at different rates to see if your payments would be within budget given the rates available to you now or in the near future.

3. Down Payment Requirements

Most mortgages require a down payment when you're buying a house. However, the size of the required down payment can vary. For example:

• Active-duty military personnel and veterans who qualify can use VA loans to buy a house without a down payment.
• People who meet the requirements for FHA loans may be able to buy a house with a down payment as low as 3.5% of the purchase price.
• Conventional mortgages allow you to put as little as 3% down.

Most loans that allow you to make a small down payment require some type of mortgage insurance to protect the lender from losses in case of foreclosure.

For example, for a conventional loan, if you don’t make a 20% down payment you’ll be required to pay private mortgage insurance (PMI). This would mean if you bought a $400,000 home, you'd need to put down $80,000 to avoid added monthly costs.

Saving up a down payment can be challenging, but there is help available for some future homebuyers. As our first-time homebuyer guide explains, there are grants and special programs that provide down payment assistance for people who have never owned a home before.

Still, putting some money down allows you to avoid getting into a situation where you owe more than your home is worth. It can also help you to save a lot of money on borrowing costs over time. Ideally, you should aim to put 20% down, but if you can't do that, you can expect to need at least 3% to 3.5% in most cases (unless you qualify for a VA loan).

4. Monthly Payment Affordability

When you get a mortgage to buy a home, you'll make monthly payments until it’s paid off. It's critical you make sure these payments are affordable.

In all cases, your monthly payment will include principal and interest. Interest is the cost of borrowing, while principal refers to the initial amount you borrowed. The monthly cost of principal and interest payments is based on your loan term and interest rate, with the amount determined by how much you must pay to bring your balance to $0 by the end of the loan term.

Many lenders also require you to add property tax and insurance payments to your monthly mortgage payment. So, for example, the lender calculates your total annual costs for insurance and property tax, divides that amount by 12, and requires you to pay the necessary amount each month. The money goes into an escrow account, so it is ready when the bills come.

When you add all these different costs together, you get your total payment. This is sometimes called PITI for Principal, Interest, Taxes, Insurance. Most lenders want your PITI to be below 28% of your gross income, although some lenders allow this number to be higher (especially if you don't have a lot of other debt).

If you can't comfortably afford a monthly payment given all of your financial goals and commitments, you'll either need to wait to buy a home or opt for a cheaper property that is within your budget.

5. Savings and Emergency Funds

Some mortgages require you to have some cash in reserve before you qualify. This gives lenders the confidence that you'll be able to pay your home loan if you temporarily lose your job. You may need to have several months of reserves, such as enough in savings to cover between one and six months of payments, although requirements vary by loan type and lender.

Even if your lender doesn't require a certain amount of savings, it's important to make sure you're prepared for unexpected expenses as a homeowner. You won't have a landlord to turn to if repairs are necessary, so you should be ready to pay for them. Having money to cover your mortgage in case of unexpected events is also important to avoid foreclosure.

Most experts recommend having an emergency fund that covers three to six months of living expenses so you can pay the bills for a while even if something goes wrong. This is separate from the money you have saved for your closing costs and down payment.

6. Home Maintenance Requirements

In addition to your emergency fund, you also need savings to cover the costs of routine maintenance (as well as unexpected problems) with the home.

Many experts recommend saving around 1% of the cost of your home each year for maintenance and repairs. While you may not use this much money every year, maintaining a savings account for big repair bills, like fixing a roof, can help you to protect your home's value and avoid having to take on extra debt to make big repairs.

You also need to be prepared and ready to take on the task of maintaining a home. This means planning for things like lawn care, snow removal, cleaning the gutters, changing the air filters, and doing a host of other tasks to keep your home in good shape.

7. Related Costs

Homeownership comes with other costs as well, including things like utilities, furniture, and appliances. And, you'll have moving costs to think about.

Consider whether you have the money saved, or the income available, to pay for these other expenses. You don't want to find yourself house-poor and living in a home you can't heat to a comfortable temperature or that's empty of furniture because you can't afford to fill it.

You can research many of these costs by asking owners of homes you are interested in buying what typical monthly utility bills are. If you aren't ready to commit to these added expenses, then you might not be ready to buy a home.

8. Long-Term Commitment

Finally, you'll want to make sure you are going to own the house for at least two years, and ideally much longer, before you buy. There are a few reasons for that:

• Closing costs can be expensive, often adding up to between 2% and 5% of the home’s purchase price. It's not always worth incurring this big expense if you'll move soon, because you might not earn enough of a profit on the house to cover the upfront expense.
• Homes aren't a liquid asset. They can take time to sell, and if you are planning to move to another location in the near future, you probably don't want to be saddled with a home you need to sell when you're ready to leave.
• Capital gains taxes. You can usually exclude the profit from the sale of a primary home from capital gains tax, but you must live in the house for a minimum of two years to be eligible for a capital gains home sale waiver.

You should also research the new neighborhood carefully including the school system (if you have, or will have, kids) as well as the potential to build equity through rising prices in the community.

Final Thoughts: Are You Ready to Purchase a Home?

Considering the key issues discussed above will help you determine if you should buy a house now.

This isn't a decision you have to make alone, though.

Reach out to a mortgage loan officer at Freedom Mortgage today to find how much you can save with a home loan. You’ll go through all information you need, including what your mortgage rate, terms and monthly payment will be, so you can be well prepared when you're ready to start your homeownership journey.