Should I Buy A House Or Wait?
Kevin Graham14-Minute Read
February 26, 2021
Mortgage rates are low enough right now that many people may find themselves asking the following question: Should I buy a house? How do I know when I’m ready?
Today, we’ll be going over the signs that might show you’re ready to buy a home as well as signs that it might be better to wait. Finally, we’ll finish by taking a look at some common questions that are coming up for potential home buyers in the current market.
5 Signs That You Should Buy A House
In the following sections, we’ll go over characteristics associated with those well on their way to getting the keys to a home of their own. Here are five signs that you might be ready to buy a house.
1. You Have A Low Debt-To-Income Ratio
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.
You don’t have to be debt-free, but you do want to keep the amount of debt you’re paying on in line. DTI is one of the biggest determinants of how much home you can afford because it helps determine the highest possible mortgage payment a lender will qualify you with.
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 20%. 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 March of last year, the latest month for which data was available, was 21.7%. 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 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 other 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: A 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 a 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.
- 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 dues 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.
- 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.
- 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 maintenance. To get an idea of the kinds of expenses you can expect, check out this home maintenance checklist.
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.
The VA doesn’t set a minimum qualifying FICO® Score, but lenders are free to set their own standards. Rocket Mortgage® requires a 620 credit score. The conventional loans that most lenders do, backed by Fannie Mae and Freddie Mac, require a median credit score of at least 620 as well. Finally, for jumbo loans, you’ll need a score of 700 or better. Your score may need to be higher depending on the loan amount.
5. You Feel Ready And 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.
Before taking that on, you should feel confident from a financial and career standpoint. You’ll also want to know that this is the place you want to be.
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 this on isn’t feasible for everyone, especially if they have a higher level of existing debt.
If your debt is preventing you from purchasing the home you want or 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 Enough Savings
Buying a house requires some significant upfront expenses. Depending on the type of loan you’re getting and your financial goals, you’ll want to have 3% – 20% saved for a down payment. Moreover, you’ll likely need anywhere between 3% – 6% for closing costs.
Some loan options will require you to have a certain number of months’ worth of reserves. This means that you could make your mortgage payment for a certain amount of time in the event of a sudden loss of income or other financial stressor like a medical emergency or unexpected home repair.
Regardless of whether it’s required, it’s a good idea to have 3 – 6 months’ worth of living expenses saved before you really consider buying a home to give you some peace of mind in knowing that you’re in solid financial shape.
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.
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.
For some general tips to help get you started on your journey, here are some action items to get your credit mortgage-ready.
4. You Plan To Move Within The Next 5 Years
If you plan to move in the next 5 years, for many people renting a home makes more sense than buying 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. You Have Other Big Expenses To Consider
A home is a major life expense, but it’s far from the only one you have to think about. If you’re also planning a wedding or about to welcome the new baby or taking on any other major expense, you should consider whether you have the budget to buy a home at this time.
If you have a hard time making the math work, you should wait until you can grow your savings again so you can cover all of your life expenses in addition to your mortgage.
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.
Should I Keep Renting Or Buy A House?
If you’re trying to decide whether to buy or rent a house, there are advantages and disadvantages to each. Let’s start with renting and then we’ll move on to buying a house.
- Lower upfront costs: You can usually get into a rental for the first and last month’s rent and a security deposit.
- Move on easier: If you need to relocate, it’s easier move on. You just need to give your landlord notice.
- Landlord handles maintenance: If the refrigerator breaks, it’s someone else’s problem. You just make a call and it can be fixed.
- Easier qualification: While you might have to have your credit run to apply for an apartment or rented home, it’s generally easier to qualify. The landlord isn’t taking a huge risk because they can always find another tenant. This makes renting ideal if you’re trying to work on your credit. Moreover, if payments are reported, it can help your credit score.
- It may not be cheap: Depending on where you live, a monthly mortgage payment can be less expensive than the cost of rent. Rent also has a tendency to only go up.
- Landlord gets rich: Rather than being your investment, your money is going straight into someone else’s pocket. If real estate values go up, someone else sees the gains instead of yourself.
- No guarantee of stability: If the landlord decides to sell the property or you don’t like the amount your rent has increased, you may continually have to be finding a new place.
On the homeownership side, here are the pros and cons:
- Investing in you: Each time you make a payment or your home goes up in value, you gain equity that can later be mined for its investment potential to help you accomplish your personal and financial goals.
- The math can work: You may find that it’s cheaper to buy a house and have a mortgage payment than to rent one. If you have a fixed rate, you might also find that your payment is more stable from year to year.
- It’s yours: Rather than going through a cycle of trying to find a new spot every couple of years, this gives you a chance to put down roots and have a place of your own to come back to.
- High initial investment: You’ll need to pay for both the down payment and closing costs, which is not an insignificant chunk of change.
- You need good credit: If you’ve had dings in the past, it can be harder to qualify for a home than to rent one. Also, if you’re relatively new to credit, you might want to rent for a while to build up your credit history before applying for a home. This will increase your chances of approval and help you get lower rates.
- Maintenance: You’ll be responsible for all utilities, which may or may not have been the case in the past. Additionally, when things break, it’s on you to get them fixed, so that definitely has to be factored into the budget.
- Property taxes: Although your principal and interest payment won’t change if you have a fixed-rate mortgage, your property taxes may increase as your home value increases.
How Much Money Should I Save Before Buying A House?
Saving for a house can certainly be an obstacle, although it doesn’t need to be one that’s daunting to overcome. When thinking about how much you need to save to buy a home, consider the following:
- Down payment: USDA and VA loans have no required down payment, but the minimum down payment on an FHA loan is 3.5% of the purchase price. Conventional loans have minimum down payments of between 3% – 5% depending on your income or first-time home buyer status. If you’re trying to get a jumbo loan or avoid PMI, expect to pay 20%.
- Closing costs: Closing costs can range anywhere from 3% – 6% of the loan amount. These include cost for title insurance, county recording fees and origination fees, among others.
- Maintenance: This is a recurring cost, but expect to pay 1% – 3% per year in maintenance costs depending on the age of the house, its appliances and systems.
- Utilities: You’ll also need to pay for electric, gas and water on a regular basis. The records of the previous homeowners may give you some guidance on how much this will cost. Things like cable and internet will depend much more on your personal choices, but that’s also a recurring cost.
- Homeowners insurance: Mortgage investors require you to have a homeowners insurance policy to replace or repair the property in the event of damage. Rates are going to depend on the coverage amount you have and the area in which you’re living, among other factors.
- Property taxes: Real estate taxes will fluctuate with your property value, but you should budget for them as well.
Should I Buy A House During COVID-19?
With the virus still actively forcing society to put many of its plans on hold, you may be wondering whether it’s really the time to buy a house during COVID-19. 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.
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 pretty thin. At the current pace of sales, supply in the market for new homes is at just 4.3 months while the market for existing homes has just 1.9 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.
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 Homes® 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 any safety precautions or desire for social distancing.
The Bottom Line
When you’re trying to decide whether now is the right time to buy a house, there are several factors you should think about. Signs you might be ready include having a low DTI, having saved enough for a down payment, budgeting for other homeownership costs and having a good credit score.
On the other hand, you should consider waiting if you have a lot of debt or not enough savings. A low credit score or a plan to move soon might also deter you from buying. Finally, the timing might not be read if you’re managing other large expenses.
Not quite there yet? Learn how to save for a house and make a plan to get there.
Table of Contents
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