Buying your first home can be a major milestone in your financial journey, but it also comes with long-term financial responsibilities. Knowing what aspects of your finances you need to bolster as you think about buying a home for the first time can help you qualify for your mortgage and pay it off successfully.
Before you decide to buy a home, review these key indicators to know when you’re ready to take the next steps.
Your Credit Is Strong Enough
Your credit score speaks to your ability to pay off debt. Lenders may use it to set loan eligibility, terms, and interest rates. Depending on the type of mortgage you’re seeking, your credit score may need to be in a certain range to qualify.
Additionally, with a higher credit score, you might be able to access lower interest rates. Keep in mind, though, this will depend on what credit score model a lender uses to assess your potential as a borrower. According to the Consumer Financial Protection Bureau (CFPB), most mortgage lenders will use a FICO® score.
Before buying a home, you may also want to review your credit report. That way, you can look for potential errors or use information from the report to improve your score. For example, if you find that your credit utilization is too high, you may want to take some time to reduce it.
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 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
When planning to take out a mortgage, make sure you have enough saved to cover down payments, closing costs, and unexpected events or emergencies.
The minimum down payment you need to take out a mortgage may depend on the type of mortgage, as well as your lender, creditworthiness, DTI, and income. Closing costs may also vary depending on your lender, location, and the types of fees involved, but they can be significant. According to Business Insider, the average closing costs for a home are between 2% and 5% of its purchase value. To get an idea for your mortgage, you can take a look at your loan estimate and ask your lender.
At the same time, you’ll want to have more funds saved in case any financial emergency arises after you qualify for your loan. For this reason, it may be wise to save some additional funds in case you need to make payments toward unforeseen expenses.
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, and 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: 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, but you should also make sure that you are in the right financial position. Making sure you have sufficient credit, income, and savings to pay for some of the costs associated with starting a mortgage can be key to successful homeownership. At the same time, it can be useful to limit your debts and plan to stay at your new home for a number of years.
Disclaimer: Article content is intended for information only. It may not reflect the publisher nor employees’ views. Consult a mortgage professional before making financial decisions. Publishers or platforms may be compensated for access to third party websites.
