I still remember the first time I seriously considered buying a home. On paper, it seemed doable. I had some savings, a decent credit score, and a steady income. But deep down, I wasn’t sure if I was financially prepared or just emotionally eager.
Buying your first home can be a major milestone in your financial journey, but it also comes with long-term financial responsibilities. Understanding which aspects of your finances need improvement when considering a first-time home purchase can help you qualify for a mortgage and pay it off successfully.
If you’re in that same stage, feeling excited but unsure, this guide is here to help.
In this blog post, I will discuss the key indicators you should know to understand if you are financially prepared for homeownership.
Guide to Know If You’re Financially Prepared to Buy a New Home
Your Credit Is Strong Enough
Your credit scores tell about your debt repayment capacity. Lenders can use it to determine the eligibility, terms, and interest rates given out in loans when you are buying a home for the first time. Depending on the kind of mortgage you are applying for, your credit score might require falling within a particular range to qualify.
Also, you may be able to get lower interest rates with an improved credit score. Remember, this will be dependent on the credit score model that a lender applies in an assessment of your creditworthiness as a borrower. The majority of mortgage lenders will utilize a FICO score, as required by the Consumer Financial Protection Bureau (CFPB).
Your credit report is also something you may want to review before making a home purchase. In such a way, you will be able to search for possible mistakes or follow the data in the report to score better. For instance, when you discover that your credit utilization is excessive, you might wish to pause to reduce it. Or, you can choose to diversify your use of credit by opening multiple lines of credit, which can also boost your score.
Your Income Is Steady and Reliable
Having a consistent income is key when taking out a mortgage. Lenders often want to see a consistent employment history when they examine your loan application, and they want to see that you have enough funds to make the mortgage payments. They may also examine your income as it relates to your debt, calculating a debt-to-income (DTI) ratio that estimates your ability to make mortgage payments consistently.
At the same time, you want to make sure that you have a long-term ability to make payments. If you feel like you might be making a career change or sense some potential turbulence with your income in the near future, now might not be the right time to buy a house. Remember, if you fail to make mortgage payments, you could risk losing your home, so having a reliable income could help you plan with confidence.
You’ve Saved Enough for a Down Payment, Closing Costs, and Reserves
Before deciding to borrow a mortgage, ensure you save enough money to maintain down payments, closing fees and contingency or emergencies. The down payment required to acquire a mortgage can vary depending on several factors. It may include your loan type, loan provider, creditworthiness, debt-to-equity ratio, and income amount.
These closing costs can be large, as well, depending on your lender, location and the kind of fees involved, although they can be substantial. According to Business Insider, the average cost incurred in closing a house is estimated to be 2% to 5% of the purchase price. To have a thought on the mortgage, you may look at your loan estimate and request your lender.
Meanwhile, you will then wish to save additional amounts of money in case there is a financial emergency after you have received your loan. For this reason, it might be prudent to put aside a little extra money just in case you are called on to pay some unexpected bills.
Your Debt Is Under Control
When you buy a home, lenders also examine your current debts, specifically in relation to your income. They look at your DTI ratio, which helps them understand whether you have enough money after you pay your monthly debts to make mortgage payments.
Most types of loans have a maximum DTI ratio that lenders will accept in order to approve you for a mortgage. But a lower DTI ratio may help you access better rates from lenders. If you’re worried that your DTI ratio is too high, you may want to pay off more debts before locking into a mortgage.
How Long Are You Planning to Stay?
Home ownership often makes the most sense if you’re ready to live in your home for a number of years. As you build equity in your home, you’re more likely to make more money if you sell your home in the future.
Financial advisors often say that five years is a good time to begin to consider selling your home if you want to go somewhere else, because you’ve built up enough equity to make more money on a sale.
Final Thoughts on Getting Ready to Own a Home
If you’re getting ready to buy a home, you should get excited for the next stage of your life. When preparing to purchase a home, you should be excited about the next phase of your life. But you should also ensure you are in the right financial state.
Ensuring you have sufficient credit, income, and savings to cover initial mortgage expenses can be crucial to achieving successful home ownership. Simultaneously, it can be helpful to reduce your debts and intend to spend several years in your new house.
