Are You Ready to Buy a Home? The Home Buying Checklist
“When am I ready to buy a house?”
It’s an important question to ask yourself since the home buying process is often as challenging as it is rewarding. While there’s no one right answer, there are ways you can determine when you’re ready to buy a house.
Here are some factors to consider, as well as some resources that can help you make a decision regarding the right time to buy, and how to find a mortgage lender.
Home buying Checklist
Buying a home is a major life decision. Before you start looking, use the following home buying checklist to assess your readiness.
Low Debt
When you apply for a mortgage, your lender will conduct a thorough analysis of your finances, including your debt-to-income ratio, which measures the ratio between your monthly income and outstanding debt.
Lenders prefer borrowers to have a debt-to-income ratio of no more than 43%, which means your total debts don’t exceed 43% of your gross monthly income.
For example, if you earn $5,000 per month and your monthly bills total $1,800, you have a debt-to-income ratio of 36% ($1,800/$5,000). But if your bills total $2,500, your ratio jumps to 50%.
Before buying a home, it can be helpful to pay off your credit card debt or auto loan or refinance your student loans to minimize your monthly debts.
Down Payment
When it comes to home buying, a good rule of thumb is to have 20% saved for a down payment.
This isn’t a hard and fast rule, as many home loan programs allow you to buy a home with as little as 3% to no money down, but without a 20% down payment, you might have to pay private mortgage insurance (PMI), which could increase your monthly mortgage payments.
Furthermore, the more money you put down, the less you’ll have to borrow. A smaller loan amount will translate into a lower monthly mortgage payment, saving you money each month.
Saving for a down payment before you start shopping for a home can increase the amount of home you can afford. Make sure you have enough savings to cover closing costs and your first mortgage payment.
Credit Score
How’s your credit score? In today’s environment, a borrower can acquire a loan even with a less-than-ideal credit score. For a conventional mortgage, most lenders will require a credit score of at least 620 to qualify. For an FHA loan, a credit score could be between 500-580, depending on your available down payment.
That’s why it helps to boost your credit as much as possible before applying for a mortgage. Even an increase of 40 points or more can save you thousands of dollars over the course of your loan.
4. Monthly mortgage Payments and Home Maintenance
How will your mortgage fit into your broader budget?
When you buy a home, you’ll need enough to cover your monthly mortgage payments and property taxes, along with other costs. Homeowners insurance, for example, costs an average of $100 monthly. And if you purchased your home with a down payment of less than 20%, you may be responsible for monthly PMI payments.
Making sure you can afford your monthly payments might be the most important part of the home buying process. So make sure you sit down with your lender and do a thorough calculation of your expected monthly mortgage payments and the other expenses that go along with it.
5. Area of Ownership
Where do you see yourself in five years? It’s important to buy in an area that a borrower is comfortable in. Does the city have a good school district? Is there nightlife? How is the commute? Is it close to family and friends? All are important areas in deciding where to live.
6. Rent vs. Buy
Why buy when you can rent? Renting has advantages, especially since your landlord will cover maintenance and repair. Renting may also be necessary until you’re ready to buy a home.
Despite the flexibility of renting, buying is often the better option, at least if you plan on staying in the area for five to seven years. A house is an investment — by buying a home, you’re keeping your financial future secure.
For example, if your rent and potential mortgage are the same amounts of money, your mortgage payment would help reduce mortgage principal and build up equity in your home. With a rent payment, that payment goes to the landlord and does not allow you to build value.
That's your home buying checklist! Did you check all the boxes? If so, you're ready to start the home buying process.
