Homeownership is a milestone that many people strive to achieve. But despite the benefits that come from buying a home, doing it at the wrong time can have adverse financial consequences. So before deciding to purchase a home, check to see if you meet these five conditions to avoid any unnecessary risks.
You have stable income.
The number one factor when deciding to buy a home is ability to repay. If you’re not financially stable, there’s no guarantee that you’ll be able to afford a mortgage for the long-term, even if you’re doing well now. Not only is going into homeownership with unsteady employment risky, but many lenders won’t approve those who have not been employed in the same industry at least the past two years.
If you’ve switched jobs recently or don’t see a future for yourself in your current position, it may not be the best time to buy a home right now.
You can cover upfront costs.
Getting ready to buy a house requires financial planning and enough money saved up for a down payment. You’ll also need enough funds to cover closing costs, which usually add up to about 3-5% of the property purchase price.
To win a lender’s trust, you should also have ample reserves—the money you have left in your bank account after paying the initial fees. Most lenders prefer that you have a minimum of two months’ mortgage payments saved up. But it’s in your best interest to have more than that to cover any emergencies that may arise.
You have good credit.
It goes without saying that you should have good credit to buy a house, but there’s more to good credit standing than just your credit score. Lenders will also look at your debt-to-income ratio (DTI)—a measurement comparing how much you owe with how much you earn. In most cases, they’ll want applicants to have a DTI no higher than 45%.
To calculate your DTI, use the following formula:
DTI = (Total monthly debt payments ÷ monthly income) x 100
In other words, add up all of the debt payments you make in a given month. Then divide that number by your monthly income. Finally, multiply that number by 100.
As for credit score, you may be approved for an FHA loan with a minimum score of 580, but conventional loans will typically require a score of at least 620. Having a higher credit score not only makes you more likely to be approved for a mortgage, but also lowers the amount of money you’ll need to pay.
You’re shopping in a buyer’s market.
The final factor to consider when deciding whether it’s the right time to buy a house is the market in your area. Ideally, you want to be in a buyer’s market, i.e., where supply is greater than demand. In this market climate, sellers are more motivated to sell, so they’ll generally be more flexible with price negotiations.
To determine whether you’re currently in a buyer’s market or a seller’s market, ask a qualified real estate agent to help you analyze market trends.
Are you ready?
If you’ve considered the factors above and conclude that you’re ready to become a homeowner, speak with a Cross Timbers Mortgage expert, who can guide you on your home financing process.