For many Americans, the largest purchase they will make in their lifetime is buying a home. As of writing, the average home price is on the rise, costing an estimated $300,000 to $350,000.
Many homeowners take out a 15 or 30-year mortgage to help them finance the cost of the home. Because it is such a large expense, it can be difficult to decide when the best time to buy a house is.
Many potential homeowners fall into the trap of buying a house when they have an influx of money. While having extra money is a good sign, it does not mean you are financially stable enough to purchase a home.
Money is not the only consideration when buying a home. Owning your own home is a large responsibility, especially if you are used to your landlord handling issues with your current rental property.
If you are stuck deciding whether or not you are ready to buy a home, there are several factors to consider.
You Can Afford a Down Payment
For many first-time homebuyers, the decision to buy a house comes down to the ability to make a reasonable down payment. How much you must spend on a down payment changes based on the housing loan you want to get.
A good rule of thumb is you should be able to pay up to 20 percent of the loan amount upfront. Not all loans require you to make a large down payment. There are even some loans that only require 3.5 percent of a down payment.
While these loans may be tempting, you may be better off in the long run making a larger down payment, since it reduces how much you pay on your mortgage as well as the overall time to pay off your home.
If you are unsure exactly how much you will need for a down payment, start looking at the average cost of homes in the neighborhood you want to live in. You can take these figures and get a rough estimate of the down payment.
If you are financially comfortable with this amount, it is a good indicator you may be ready to purchase a home.
Looking at the costs of a down payment is also a good way to get ready to look for homes. It makes you consider what types of loans are available while also considering where you want to live.
Maintenance Costs are Not An Issue
Being able to make a down payment is important, but it is not the only financial indicator you are ready for a home.
Owning your own home means you are responsible for all the upkeep. This also includes any issues with your home.
Even if you are buying a newly built home, there is the chance something could break down within your first year. On average, homeowners spend an estimated $3,000 each year on miscellaneous housing costs. You also need to factor in homeowner’s insurance, which costs around $1,000 to $1,500 per year, depending on your state.
How much you want to set aside in maintenance costs is up to you. A common rule of thumb for any emergency account is anywhere between three to six months of expenses.
If you still have enough in your savings to set aside for an emergency fund after making a down payment, this is a strong indicator you are ready to purchase a home.
You are Comfortable with Debt
Buying a home ultimately means putting yourself in financial debt. If you already have a lot of existing loans, such as a car payment or college costs, it may not be time to purchase a home.
Having debt is not necessarily a sign you cannot purchase a home. However, you should consider whether you are able to make your existing payments on top of a mortgage.
Not only is your current debt a general indicator of your finances, but it will play a large role in whether you can get a housing loan. Your existing debt has an impact on your credit score, which is used to determine your eligibility for loans.
A common recommendation is if more than 40 percent of your current income goes into paying off your debt, you should wait before purchasing a home.
Rent is Increasing
Not all of the signs you are ready to purchase a house relate to your finances. Part of buying a home is finding the right time to make the purchase.
While some home buyers make purchases based around the housing market, this is not always an option for first-time buyers. Instead, they base their decisions around the cost of rent in the area.
If the cost of rent is increasing, it can make it significantly harder to save up to purchase a house. With rental leases, you are typically required to sign on for a year. While there are some options to get out of your lease early, it is not always an easy process.
This should not be your sole reason for buying a house, but it is worth considering if you are worried about losing more of your savings to increase rental costs. As of writing, rental costs have seen a steady increase, with housing counselors predicting a continued increase in costs for 2023.
Major Life Changes
Another consideration for purchasing a home is when you are making a major life change. Many first-time homeowners decide to purchase a home after getting married. Others choose to buy a home when they are getting ready to have children.
If you are planning to move for work, you may also consider getting a house instead of renting an apartment.
You Know What You Want
Buying a home is not a decision you should make on a whim. On average, first-time buyers spend at least five years in their home.
If you are on the fence about buying a house or are having trouble making a selection, this is a strong indicator you are not ready to purchase a home. You must not only be comfortable picking a house, but going through the lengthy home buying process.