Before you decide to purchase a home, it’s important to determine whether it’s the right path for you at this point in your life and career. Otherwise, you risk making a major home buying mistake that will be difficult and costly to amend.
Everything from your personal finances to your lifestyle needs in the future will impact how successful you are as a homeowner. Here’s what to consider when deciding whether to buy a house now or wait.
Factors to Consider Before Buying a House
Buying a home is a major commitment you shouldn’t enter into lightly. Although you may feel pressured to take the leap from renting to homeownership, there are a number of factors you need to consider before you do.
1. How Much You Have for a Down Payment
Your personal finances play a crucial role in your ability to buy a home and support yourself once you’ve taken on a mortgage.
First and foremost, do you have enough for a down payment? Most banks and lenders will expect you to have 20% of the purchase price of the home in order to avoid having to pay private mortgage insurance (PMI).
If you don’t have a large enough down payment, you’ll be required to purchase PMI, which serves to protect the bank or mortgage lender if you default on the loan. Depending on how much you borrow, what your credit score is, and your lender, the Urban Institute estimates PMI can cost anywhere from 0.58% to 1.86% of the original amount of your loan.
If you purchased a new home for $300,000 and were only able to put down $10,000, your home loan would be for $290,000. At a rate of 1%, your monthly PMI payment would be about $240 on top of your mortgage payment, and you would end up paying more than $25,000 in mortgage insurance before you reached the 20% equity mark.
That’s a lot of extra money spent on something that doesn’t really benefit you. When possible, it’s best to wait until you can afford to put 20% down on your home so you can avoid having to purchase private mortgage insurance at all.
2. Whether You Can Afford Mortgage Payments
Even if you have saved enough to put 20% down on a home, you need to evaluate your personal budget to ensure you can afford to become a homeowner. Monthly mortgage payments will have a major impact on your budget, and they aren’t always predictable.
For example, have you considered how your mortgage type and interest rate can impact your monthly mortgage payments? A fixed-rate mortgage means that your payments will stay the same until you refinance your mortgage, but adjustable-rate mortgages lead to unpredictable payment amounts that vary based on fluctuations in an index rate.
Although fraught with risk, many people choose adjustable-rate mortgages because they often come with low interest rates in the beginning. But as the interest rate changes, so will your mortgage payments, causing you to have to pay more when they increase, which can do a number on your budget.
If your fixed interest rate is high due to a poor credit score, down payment, or other factors like your debt-to-income ratio, don’t opt for an adjustable-rate mortgage unless you’re certain you can afford it. Otherwise, you probably aren’t ready to become a homebuyer just yet.
3. Your Financial Stability
Just because you’re in a good financial position right now doesn’t mean you will be in the future. If you’ve recently changed jobs or you’re concerned about your job security, now’s not the time to add a major financial burden like a mortgage to the mix.
Most banks and lenders will expect borrowers to have a proven job history of at least two years within the same industry or with the same employer. This means if you switched career paths in the past year, you may not be able to get approved for a mortgage.
Financial stability also means that you have an emergency fund you can access to cover your mortgage payments if you lose your job or have to cover unexpected costs like medical bills or home repairs. If you’re living paycheck to paycheck and struggle to manage extraneous expenses, it’s not the right time for you to enter the housing market.
4. Your Credit Score
Your credit score plays a big part in whether you’re approved for a mortgage and what interest rate you’re offered. Borrowers with credit scores of 720 and higher typically benefit from low mortgage rates compared to those with poor credit ratings, who can end up paying thousands more in interest over the course of a home loan.
- Removing hard inquiries from your credit report
- Paying down debt, like credit cards and auto loans
- Fixing errors on your credit report
- Making monthly payments on time and in full, like cellphone bills and car payments
- Avoiding applying for additional credit cards and loans
If you use your credit wisely, pay your bills when they’re due, and stay away from accruing additional debt, your credit score will improve with time. Consider starting the home buying process when your credit score is high enough to qualify you for a reasonable interest rate.
5. How Long You Want to Live in the Same Place
Even if you have an excellent credit score and your personal finances are in good working order, it doesn’t mean you should jump straight into buying a home. How long you plan to stay in the home can affect whether becoming a first-time homebuyer is right for you at this point in time.
Aside from the asking price, home sales also come with closing costs, which can total several thousand dollars. These cover a variety of administrative tasks such as legally transferring the property title and fees for obtaining a loan.
On top of that, most of your initial mortgage payments don’t go toward your loan balance at all. Instead, almost all of your earliest mortgage payments go toward paying down your interest charges.
And, if you do decide to sell, you’ll have to cover additional selling costs, like a realtor’s commission fee.
All of these expenses mean that if you buy a property but plan to sell it within the next year or two, you may find it hard to recuperate your costs, let alone make any profit from a home sale.
Typically, it’s recommended that you live in a home for at least five years before you sell it again in order to increase your chances of recouping your costs.
6. The Current Housing Market
The state of the real estate market is a big factor in whether and when you should buy a home. The housing market affects everything from home prices and interest rates to whether you should expect to participate in bidding wars against other buyers.
Ideally, you want to purchase a home in a buyer’s market. In a buyer’s market, housing inventory is high relative to demand for houses, keeping prices low and giving prospective buyers lots of opportunities to shop around.
By contrast, a seller’s market means there are more buyers than there are houses available. Buying in a seller’s market means you’ll face fierce competition and houses will be expensive. In some seller’s markets, home values can double or even triple, causing housing prices to skyrocket.
Before deciding to buy, reach out to a real estate agent to talk to them about the current state of the real estate market. They’ll be able to offer you insight about when is the best time to buy, what the upcoming market predictions are, and whether it would be best for you to hold off until things stabilize.
7. Your Lifestyle Needs Now
Your current and future lifestyle also affect whether now is a good time for you to buy a home. If you plan to get married, start a family, found a business, or travel extensively, all of these factors may influence your decision.
Before committing to a mortgage, it’s important to think about whether you expect your lifestyle to change significantly in the near future and how those changes could impact your ability to afford a mortgage or your desire to stay in one place.
For example, if you want to explore freelancing and live the life of a digital nomad, tying yourself down to a mortgage and property won’t do you any favors. Or, if you’re having a baby in the near future, child care costs could impact your budget enough to affect your ability to make mortgage payments.
8. Whether You Can Afford the House You Want
When looking for a house to buy, there are all kinds of different features to consider, from the size and location to the amenities you’ll have access to. However, the more desirable a home is, the pricier it will be.
Think about what you really want in a home and what’s most important to you. Is there a specific community you want to live in, or do you want a turnkey property downtown? The purchase price of your ideal home may be more than you expected and might be a stretch for your budget.
On the other hand, you don’t want to settle for a property you aren’t happy with.
Look at homes for sale in your area on a site like Zillow to get a feel for what’s available in your area and within your budget. If you can’t find the right home, either wait for the market to change or until you can afford the kind of home you would be happy to own.
9. The Costs of Home Ownership
Even if you’ve saved enough for a down payment and you know your budget can support monthly mortgage payments, it doesn’t mean that you’re financially ready to own a home. Homeownership comes with a number of additional costs, including:
- Homeowners insurance
- Property taxes
Some of these costs, like property taxes and insurance, may be rolled into your monthly mortgage payments, but they won’t be included in the mortgage itself. This means that they’ll increase your overall monthly payment amounts without allowing you to borrow more from a lender to cover them.
Many mortgage calculators will include an estimate for property taxes and home insurance, so pay close attention to the total monthly amount you can expect to pay — not just how much you’ll owe for your mortgage payment.
Your income and budget need to be able to support all of these additional costs, or else you’ll struggle to stay afloat.
10. Your Motivation for Buying
Another consideration is your motivation to become a homeowner. Are you buying because you’re financially able to and are excited to own a home, or because you just got a new job and all your friends are doing it?
Ultimately, you should buy a home when you feel ready to based on your finances, job security, and goals. It shouldn’t be something you do because you feel pressured or on a whim. If you don’t wait until you’re ready, you could end up regretting your decision and putting yourself in a stressful and complicated financial situation.
So many different factors influence whether you’re ready to buy your first home, from your own finances to the prevailing mortgage rates to housing prices and the real estate market. Buying a home is an investment, but it’s also a big commitment.
Before you buy, make sure that you’re ready to take on homeownership and everything that entails. Evaluate your personal finances, consider what’s motivating you, and research real estate in your area to determine whether you should buy a house now or give it some time.