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Should I Buy A House Or Wait?

Kevin Graham14-Minute Read
November 04, 2021

There's a lot that goes into home buying. Do you have the down payment? How much can you afford? Are you ready to commit to a house?

For you, it probably all comes down to one essential question really: Should I buy a house? We’ll break down the factors you should take into account and look at signs you should buy a house and signs you should hold off. Then we’ll answer some of the most common questions people have about the home buying process.

5 Signs That You Should Buy A House Now

In the following sections, we’ll go over characteristics associated with those we'll on their way to getting the keys to a home of their own. Here are five signs that you might be ready to buy your first house.

1. You Have Your Debt Under Control

Whether you’re a first-time home buyer or a seasoned vet of many home purchases, one thing lenders will heavily consider is your debt-to-income ratio (DTI). DTI compares your minimum monthly payments on existing debt obligations to your gross or pretax monthly income. The result is expressed as a percentage.

In addition to your down payment, which we’ll discuss next, your DTI is one of the biggest predictors of whether you’re ready to buy a home because it determines how much mortgage you can afford based on your monthly payment along with your other existing debt load. Although you don’t have to be debt-free, the debt that you have should be manageable with your new mortgage payment.

Although the maximum DTI you can get a loan with is going to depend on what mortgage program you’re qualifying for, it’s generally a good idea to keep your DTI at or below 43% in order to give yourself the most possible options.

Your DTI calculation encompasses both payments on installment debts like a mortgage, car and student loans, and the minimum payment on revolving debt like credit cards and home equity lines of credit (HELOCs).

DTI also includes payments you may have to make like child support and alimony. It doesn’t include things like utilities and cable. Let’s run through a quick example so that you know how to calculate your ratio. The formula is as follows:

Installment Debts + Revolving Debts
______________________________
Gross Monthly Income

Let’s pretend you have an annual income of $96,000. You have $600 per month in student loan payments, a mortgage payment of $1,500 per month, a car payment of $400 per month and minimum credit card payments of $350 between a few different accounts.

You make $8,000 in monthly income. Your minimum monthly debt payments total $2,850. When we plug the numbers into the formula, you end up with a DTI of roughly 35.63%.

2. You’ve Saved For A Down Payment

The other factor that tends to limit how much you can afford when you buy a home is the amount that you have saved for a down payment, or a percentage of the purchase price paid at or before closing in exchange for a mortgage financing the balance of the transaction. Some mortgage options, like VA loans, don’t require a down payment, but most do.

You can get an FHA loan with a median FICO® Score of as low as 500 if you have a down payment of 10% or higher. However, most lenders, including Rocket Mortgage®, require a median credit score of at least 580 to go along with a 3.5% down payment.

The minimum down payment for a conventional mortgage is 3% if you’re a first-time home buyer or make no more than 80% of the median income in your area. Otherwise, the minimum down payment for a one-unit primary property is no more than 5%.

Should you need a jumbo mortgage, a loan amount higher than $548,250 – more in high-cost areas, you’ll need a down payment of at least 10.01%. The requirement could be higher depending on your credit score and the overall loan amount.

According to the Federal Housing Finance Agency, the average down payment for all conventional mortgages used to purchase homes in December of last year, the latest month for which data was available, was 21.2%. There are two advantages to higher down payments along the lines of the average just mentioned.

First, a down payment of 20% or more on a conventional loan will help you avoid private mortgage insurance (PMI). PMI helps to cover lender and investor losses in the event that a borrower defaults. The cost is either paid upfront at closing, through monthly premiums or by having the borrower take a slightly higher interest rate.

Second, if everything else is held equal, a higher down payment generally means a lower rate. Simply put, if a lender doesn’t have to put up as much money, the loan is a lower risk and the borrower reaps the benefits of that.

3. You’ve Budgeted For Homeownership Costs

Many people know of the principal and interest payment that’s typically thought of as the bulk of your mortgage payment each month, but there are many additional costs and fees associated with homeownership that you should be prepared for. Here’s a quick rundown of the major ones:

  • Closing costs:Closing costs are the fees associated with setting up a mortgage and typically average 3% – 6% of the purchase price. These can include an origination fee, fees for title insurance, county registration fees and the cost of setting up an escrow account, among others.
  • Property taxes:Real estate taxes vary depending upon the area you are in and can rise and fall with the assessed value of your property. If you have an escrow account, payments for property taxes are split into monthly chunks.
  • Mortgage insurance:If you make a down payment of less than 20% on a conventional loan or you have an FHA loan, you’ll have to pay mortgage insurance premiums on a monthly basis. USDA loans have monthly payments for a guarantee fee.
  • Homeowners insurance:homeowners insurance policy covers the structure of a home and is required by lenders and mortgage investors so you have a means of rebuilding or repairing your home in the event of damage. You can get homeowners insurance to cover not only the structure of the home, but also the contents inside and optional liability coverage in case someone gets hurt on your property. The cost of homeowners insurance varies based on several factors including how you plan to occupy the property, the area you’re in, actions you’ve taken to prevent future damage, and your credit score, among others. This cost is also broken up if you have an escrow account. One thing to keep in mind is that a mortgage company may require you to pay the first year’s premium up front.
  • Homeowners association (HOA) fees:If you live within a homeowners association, you’ll have regular dues, often charged on a monthly or yearly basis. There are also often special assessments for unplanned maintenance that needs to be done or extra programs. Although these homeowners association fees are included in your payment for the purposes of qualification, they aren’t included in any kind of escrow account as part of your mortgage payment. Not all homes are part of an HOA.
  • Utilities:The cost for utilities including electric, gas, water, cable and internet have to be factored in. At least for electric, gas and water, you may be able to get an idea of the cost by asking the previous homeowners about what their bills were. If you have an idea of what these costs are ahead of time, you can better budget.
  • Home maintenance:When you own the house, you’re solely responsible for maintaining any upkeep related to the structure, systems and appliances. Depending on the age and condition of the property when you buy it, it’s recommended that you budget 1% – 3% of the purchase price of the home per year for home maintenance. This could cover everything from broken down appliances to a new roof.

4. You Have A Solid Credit Score

You need to have a qualifying credit score. For an FHA loan, that means having a median score of at least 580. To qualify with a score that low, you have to keep an equally low DTI. At a score of 620 or better, you’ll have a little more flexibility with an FHA loan around existing debt.

While the VA doesn’t set a minimum qualifying FICO® Score, lenders set their own policies. At Rocket Mortgage, you need to have a median score of at least 580. Similarly to FHA, you’ll need a low DTI to qualify with a score this low. Once your score gets up to 620 or higher, you can qualify for a fixed-rate mortgage with a DTI as high as 60%.

The conventional loans that most lenders do, backed by Fannie Mae and Freddie Mac, require a qualifying credit score of at least 620 as well. Finally, for jumbo loans, you’ll need a score of 680 or better. Your score may need to be higher depending on the loan amount, type of occupancy and down payment.

5. Your Income Is Stable

Beyond the technical factors, there’s also a piece of this that comes down to you and alternately the way you feel. Taking on a home mortgage is a long-term commitment. For many of us, it’s our biggest single financial transaction that we’ll ever have.

You should feel confident, and your lender will want to see, that your income is stable. This means not only that you have a history of receiving that income, but you’ll be able to sustain that income into the future. You don’t want to be making a big career change at the same time you’re applying for a mortgage.

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5 Signs That You Should Wait To Buy A House

Not everybody is ready to buy a home at the same time, and that’s OK. Here’s how you know you might not be ready.

1. You Have Too Much Debt

It’s not impossible to buy a home if you have existing student loan and credit card debt, but you have to be prepared and willing to both pay down your existing debts and make payments on your mortgage. Taking profound at the same time isn’t feasible for everyone, especially if they have a higher level of existing debt.

If you’re in this situation and thinking about how to save for a house, it’s important to have a strategy. There are two primary ways you’ll be able to save more. One is to cut anything you can live without temporarily out of the budget. But you can only cut back so much and you don’t want to take every last bit of fun out, so there’s strategy number two.

The second way to give yourself more money to pay down debt is to add to your income. While I know this is always easier said than done, in some ways, there’s never been a better time for this. There are a number of jobs available in the gig economy. The pandemic has also made people more comfortable with remote work performed in a flexible time frame.

If your debt is preventing you from purchasing the home you want or from being able to comfortably afford a home at this time, paying down debt can help you get there. You can make a payback plan to pay down your debt over time and reevaluate where you’re at in a year or two.

2. You Don’t Have An Emergency Fund

As you financially prepare to buy a home, you probably have begun to realize it’s your biggest expense. It can take a big chunk out of the budget. For this reason, you may not want to take it on if you don’t feel your finances are steady and sufficient enough for other areas, including an emergency fund.

An emergency fund allows you to have money set aside in the case that you lose income or have a major unexpected bill capable of causing a financial strain. It’s generally a good idea to have 3 – 6 months’ of necessary living expenses. You may not start with this amount of money, but that’s OK. The key is to start identifying those necessary expenses and saving for them little by little.

3. You Have A Low Credit Score

If you have too low of a credit score, you may find that you have a hard time qualifying at all. Even if you do qualify, increasing your credit score is beneficial because if everything else is held equal, higher credit scores can mean more favorable mortgage rates.

Blemishes like late payments, foreclosures and bankruptcies, while not impossible to come back from, will make it harder to qualify and you may even have waiting periods before you can buy a home again. If this is the case for you, you may need to rent for a while.

Bankruptcies and foreclosures aside, there are things you can do to raise your credit score like paying down debt as well as paying off collections and charge-offs. Staying in the habit of paying on time will also help.

If you’re working on increasing your credit score or even just interested in keeping an eye on it, we encourage you to sign up for your free VantageScore® 3.0 credit score and report from TransUnion®. In addition to knowing your score on a weekly basis, you’ll get helpful personalized tips on how to bring your score up.

4. You Plan To Move Within The Next 5 Years

You’re reading this article asking yourself the question “Should I buy or rent a house?” One of the big factors to consider is how long you plan to stick around.

If you plan to move in the next 5 years, it can make more sense to rent a home than buy one. To begin with, you don’t have to worry about selling your home. Instead of finding a buyer, you just give your landlord notice or wait until your contract runs out to move on to the next place.

The other thing to consider is the closing costs. Even if you can sell your home for more than you purchased it for, it’s the seller’s responsibility to pay real estate agent commission, among other costs, so you have to keep that in mind. Taking on a mortgage makes more sense if you’re making a long-term commitment.

5. Your Income Is Unstable

It’s much easier to qualify for a mortgage assuming your income is stable. Lenders will know you’ll have money coming in on a regular basis to afford your payment. If you have seasonal income, it’s not impossible but it can be harder to qualify for a loan.

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FAQ: Should I Buy A House?

Before finishing up, let’s touch on a few questions that frequently come up on the topic of whether it’s the right time to buy a home.

How do I prepare to buy a house?

Before you rush to get a mortgage approval, one of the things you can do is use a Home Affordability Calculator to take a swing at how much you can afford based on your budget. This will give you a good baseline because a preapproval will show you the top end but relying solely on that may stretch your finances to the brink. This way, you can play with the numbers to see what you might be comfortable with.

You often can’t find a home that meets everything you want and is also within your budget range, so make a list of your most important priorities. That could be things like the number of bedrooms, the location or the size of the backyard. Working with a real estate agent in your area can match you with properties that fit your goals and budget can be helpful as well.

How much should I spend on a house?

Ultimately, how much you can spend is something that should be verified by a lender. In order to figure that out, you'll want to get a preapproval. A proper preapproval involves pulling your credit report, verifying your income and checking out your assets. Some lenders will take your word for it and verify your income and assets later at the underwriting stage, but sellers want certainty, so it’s better to have this stuff verified up front.

Preapproval is ultimately based on your DTI. Assuming equal down payments, the lower your DTI, the more you can afford. How your new mortgage payment fits in with your existing debt is one of the major factors in determining how much to spend on a house.

Should I buy a house during the COVID-19 pandemic?

Although we’re learning to live with the virus, you may be wondering whether now is a good time to purchase a house. It’s a fair question to be asking. When deciding whether it’s right for you, consider the following about market conditions.

In order to ease access to credit and lending markets to provide borrowing power in a crisis, the Federal Reserve took a couple of actions that are supporting low mortgage rates. To begin with, they lowered the short-term interest rates banks borrow at to near zero. Because it’s easier for banks to get money, that translates to lower rates for consumers.

Second, because housing makes up such a substantial portion of overall economic activity, the Fed has gone big on buying mortgage-backed securities (MBS). The yields on these securities are directly tied to mortgage rates. The more investors there are in the market for mortgage bonds, the lower the yield can be while still attracting a buyer, translating to lower rates.

Although there has been talk of pulling back on some of these accommodative policies in an effort to tame inflation, this will happen gradually. They’re not going to raise rates to the max and stop buying MBS overnight. It’s still going to be a good interest rate environment for a home buyer.

That’s the upside to buying now. The downside? It’s definitely a seller’s market. Sellers have an advantage now because supply in both the new and existing home market is a little thin. At the current pace of sales, supply in the market for new homes is OK at 5.7 months while the market for existing homes has just 2.4 months’ worth of inventory available. For context, a market is considered in balance when it has a supply of about 6 months.

Homes have been selling like hot cakes because people have been spending so much time inside that they’ve come to realize their current space doesn’t work for them. The resultant spike in sales has helped push up prices and cut into the increased buying power afforded by lower rates. Every area is different and you should definitely consider housing market trends around you.

However, real estate is all about location and the market effects in your area may vary. If you’re looking for someone who can share their local market expertise and work to find you the best deal, we can match you with a Rocket HomesSM Verified Partner Agent.

Beyond prices, the other difference when shopping right now is that you might be having more virtual tours and open houses, so you may not see the home in person until you get to a certain point in the process, so that may be an adjustment. Work with your real estate agent and the sellers to make sure you’re respecting safety precautions or desire for social distancing.

The Bottom Line

Whether or not to buy a home at the moment depends on various factors including your savings, debts, credit and long-term financial goals. You should take a look at all of these before deciding whether to move forward.

If you think you're reading, go ahead and get preapproved for a mortgage from Rocket Mortgage. You can also give them a call at (833) 326-6020.

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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage he freelanced for various newspapers in the Metro Detroit area.