7 Signs You’re Financially Ready to Buy a Home

7 Signs You’re Financially Ready to Buy a Home
by John Carlucci - March 10, 2023

Buying a home is a big financial decision, and it requires careful planning and consideration before ever getting the keys to the front door. 

It is important to ensure that you are financially prepared to take on the responsibility of a mortgage and the additional expenses that come with owning a home. 

In this article, we will discuss 7 signs that demonstrate you are financially ready to buy a home.

You Have a Stable Income

One of the most important factors in determining if you are financially ready to buy a home is having a stable income that you can rely on to make your mortgage payments.

When obtaining a mortgage, be prepared to provide copies of your most recent pay stubs and your W-2 form. The best candidates for a mortgage will be able to show two years of consistent income (preferably in the same position). Alternatively, you can often provide an income letter from your new employer if you recently took a new job.

If you are self-employed, you will likely be asked to provide tax returns from the two most recent years to demonstrate your stable income. Additionally, lenders will often also request a profit-and-loss (P&L) statement and possibly recent bank statements.

You Have Savings for a Down Payment

Another sign that you are financially ready to buy a home is sufficient savings for a down payment. 

Unless you are using a VA Loan or other special loan program, a down payment is typically required when purchasing a home, and the more you can put down, the lower your monthly payment will be. You will also likely get better terms for your mortgage. 

For home buyers using a conventional loan, aim for a down payment of at least 20% of the home's value to avoid paying private mortgage insurance (PMI).

You Have Reviewed Your Credit Score

A good credit score is essential when applying for a mortgage. 

Lenders use your credit score to determine your creditworthiness and the interest rate you will be offered. A good credit score is typically 680 or above.

If you don’t know your credit score and want to determine it before applying for a mortgage, you can request a free copy of your credit report at annualcreditreport.com. Checking your own credit score has no impact on your credit score.

Many borrowers worry that applying for a mortgage will hurt their credit score. However, according to the Consumer Financial Protection Bureau, you can shop for a mortgage, and it won’t hurt your credit as long as those credit checks are all within a 45-day window.

You Have a Manageable Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes towards paying debt. 

A manageable DTI ratio is typically 36% or less. If your DTI is higher than 36%, you may want to focus on paying off debt before buying a home.

The debt-to-income limits are different for various types of mortgages. For example, the debt-to-income limit is higher for VA Loans than it is for conventional loans.

You Have Created a Budget

Buying a home can be expensive, and it is important to have a budget in place to ensure you can afford your mortgage payments and other expenses that come with owning a home. 

Be sure to account for property taxes, insurance, and maintenance costs when creating your budget. Then, account for your current lifestyle costs such as travel, food, ongoing memberships, and other things that give you happiness.

Creating a budget ensures that you aren’t “house poor” once you own your new home.

Your Emergency Fund is Established

Owning a home comes with unexpected expenses such as home repairs and maintenance. Likewise, it is important to plan for the unthinkable such as loss of employment.

As a result, it is important to have an emergency fund set aside to cover your mortgage payment in case you lose your stable income for a period of time or to cover other home expenses without having to rely on credit cards or loans.

A good rule of thumb is to have 6 months of mortgage payments available in your emergency fund.

You Have Set Aside Money for Other Closing Costs

Many new homebuyers don’t realize that there are other closing costs besides the down payment when buying a home.

These costs include a home inspection, appraisal, loan origination fees, underwriting fees, homeowner’s insurance, and prepaid interest, among others.

It’s important to talk with your realtor and mortgage lender to gain an understanding of how much these closing costs will be in your local market.

The Bottom Line

In conclusion, buying a home is a big financial decision, and it is important to ensure that you are financially prepared. By considering the signs mentioned above, you can determine if you are ready to take on the responsibility of homeownership. If you are not quite ready, focus on improving these items before making the leap into homeownership.

MOST RECENT
Navigating Change with Ease The Role of Professional Moving Companies
Navigating Change with Ease: The Role of Professional Moving Companies
Moving to a new home or office can be an exciting chapter in one's life, symbolizing change, growth, and new opportunities. However, the process of relocating can also be a daunting task, filled with challenges and stress. This is where ...
How to Ensure Your Rental is Well Looked After
How to Ensure Your Rental is Well Looked After
Unfortunately, rental properties get ruined much quicker than others. This is because nobody is going to treat your property as well as you will. You’ve put your time and energy into securing this piece of real estate, so it’s only ...
How to Stage Your Real Estate to Appeal to Families
How to Stage Your Real Estate to Appeal to Families
The average age of an American home buyer is 36, which means the chances of them bringing a family along for the ride are high. This is essential information if you are selling your home, as this demographic has distinct ...
Paying For an Unexpected Home Repair
Paying For an Unexpected Home Repair
Imagine you're journeying across the high seas, every bit of the expansive horizon matching the thrill of discovery. Suddenly, an unexpected storm hits, threatening to sink your ship. This precarious situation mirrors an unexpected home repair: an unforeseen circumstance disrupting ...
What Every Homeowner Should Know About Patio Privacy Screens
What Every Homeowner Should Know About Patio Privacy Screens
Are you in the market for a patio privacy screen but don't know where to start? This guide will take you through everything you need to know about patio privacy screens, from choosing the right material to installation and maintenance. ...
1 2 3 84
logo
Prudential Cal strives to provide the most detailed information about the real estate industry. We assist people in making the best decisions possible by offering unique insights into the global real estate market and advice for both homebuyers and sellers.
Quicklinks
Additional Information
Copyright © 2023 Prudential Cal. All Rights Reserved.
DMCA.com Protection Status
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram