Tired of renting? Ready to make permanent changes to a home of your own? Are you sure you’re ready to buy a house?
Buying a house is a huge financial decision – probably the biggest you’ll ever make. And owning a house is a big responsibility. If something breaks in your home, you’re the one who has to pay the costs to fix it. You need to have a stable income, low consumer debt, and some money saved up above and beyond a down payment. Here are five signs you’re ready to buy a house.
Conventional wisdom holds that if you buy a home, you should be prepared to hang onto it for at least five years before selling, whether that means living in it yourself the entire time or renting it out for some or all of the time. If you have lived in the home for at least two years out of the previous five, you may qualify for the capital gains exclusion on the sale of the home. You wouldn’t pay capital gains taxes on the first $250,000 in profits, or $500,000 if you’re married filing jointly.
However, saving money on capital gains isn’t the only or even the primary, reason why you should be prepared to hang onto your home for at least five years. Buying a home costs money. You pay interest on the mortgage loan, but you also pay closing costs. If you sell before the five-year mark, your home likely hasn’t appreciated in value enough to help you recoup those closing costs, so you’d be losing money. In some areas, you may even need to keep your home for longer to recoup your closing costs upon sale. However, if you’re getting a mortgage in Virginia Beach or a similarly hot market, your home may appreciate in value faster than normal, so moving in only a few years’ time may not be out of the question.
Do you feel secure in your employment? Are you confident that you’ll be able to make your mortgage payments on time every month?
You can’t always predict whether you’ll be laid off, and economic times are definitely volatile. But you should be able to show at least two years of steady employment, and feel comfortable that your employment is secure for the foreseeable future. If you’re self-employed, you’ll need to provide documentation of your income – you may even need to show your lender monthly bank statements going back two years.
Paying your debts on time and in full contributes to a healthy credit score, and a high score means you’ll get more and better loan offers with lower interest rates. You could save tens of thousands over the life of a 30-year loan simply by wrangling a better interest rate.
The ability to manage your debts well will help you fit a mortgage payment into your budget. Most lenders also look for borrowers who have a low debt-to-income (DTI) ratio – the lower your DTI, the more comfortably you can manage a mortgage payment. Conventional loans require a DTI of about 28 percent, while non-conventional loan options are available to borrowers with a DTI of up to 50 percent. The higher your DTI, the less money you can borrow in general, and the higher your interest rate will be.
It’s no longer true that you need to put 20 percent down to buy a house. These days, you can get a home loan with as little as three percent down. If you’re a low to a moderate-income borrower, you may even qualify for down payment grants which don’t have to be repaid. Every state has down payment assistance programs. Many are for first-time homebuyers, but that may not mean what you think it means – for a Federal Housing Administration (FHA) loan, for example, you can qualify as a first-time homebuyer if it’s been three years since you last owned a house.
However, just because you can put down a smaller down payment doesn’t mean you should. The larger your down payment, the more equity you’ll be starting out with, and that could come in handy if you need to take out a home equity loan.
You need more than a down payment and closing costs to buy a house. It’s often a rude awakening when the first thing in your new home breaks and it really sets in that there’s no longer a landlord to call. Homeowners spent an average of $3,192 on maintenance and $1,640 on emergency repairs in 2020. Make sure you have some money set aside to cover these costs from day one.
You need to achieve a certain level of financial stability before you’re ready to buy a house – and of course, you need geographical stability, as well. But when you’re ready, homeownership can be one of the most fulfilling parts of life, because it gives you fertile soil in which to put down your roots.