No one can tell you when you’re ready to become a homeowner. But it’s probably fair to say a lot of first-time buyers wish otherwise.
Buying a home is often one of the biggest purchases you’ll ever make. It’s also among the most infrequent. Knowing you’re prepared to buy a couch or a car is one thing. The last lot in a cul-de-sac is something else entirely.
The right time to pull the trigger is when you’re financially and emotionally prepared for the responsibility. But it’s not like the heavens part and a choir of closing agents signal the time has come.
It’s ultimately up to you to determine you’re ready. But here are a few signs and stages that might signal you’ve got a handle on home buying.
1. You Genuinely Want It
This is an emotional component for sure. Renting is easier than owning a home in a lot of ways. Each exudes its own sense of freedom, and the flexibility of renting resonates with many people.
Looking at homeownership as a lark or even an investment isn’t always the best approach. A quarter of Americans have moved from their city or geographic area in the past five years, according to a Gallup survey released earlier this year. The last few years have also made clear that equity isn’t a guarantee.
Homeownership isn’t for everyone. Pursue a home purchase because you genuinely embrace the freedom, opportunities and potential challenges that come with it.
2. You Own Your Credit
Your homebuying journey will be a brief one if you can’t meet a lender’s qualifying credit score. Credit benchmarks will vary based on the loan type and the lender, but for most loan programs you’re talking a minimum of 620 (but likely significantly higher for non-government-backed loans).
Get free copies of your credit reports early from AnnualCreditReport.com. It’s also important to monitor your credit scores for changes — which you can do either by using a paid monitoring service, or using a free credit score tool, such as Credit.com’s Credit Report Card. About one in five credit reports contain errors and inaccuracies serious enough to affect your credit scores (and therefore possibly making harder to get credit, like a home loan). Hunt down mistakes and dispute them. Work to lower balances, pay down high-interest debt and get your credit in fighting shape.
Qualifying for a loan is the initial hurdle. But continuing to improve your score can also help you save money. Higher credit scores generally translate into better mortgage rates and terms.
3. You’ve Saved for It
Even if you’re eligible for a zero-down mortgage backed by the VA or the USDA, there are always going to be upfront costs to consider, from appraisals and home inspections to closing costs and even good faith deposits.
Assets are going to play an important role when you’re looking to land a loan. Most homebuyers will also have to contend with a down payment. FHA loans require a minimum 3.5% down, while it’s typically 5% for conventional loans. On a $150,000 mortgage, that’s $5,250 and $7,500, respectively, which you’re going to part with on closing day.
Beyond that, lenders are always on the lookout for “payment shock,” which is essentially the impact of higher monthly housing costs on a borrower’s bottom line. If that down payment is all you’ve got to your name, you might be in trouble.
4. You Understand Your Mortgage Options
If you didn’t serve in the military or you don’t have a family member who has served, you can pretty much skip VA loans. But you might be able to get a no-down payment loan using the USDA’s home loan program.
Conventional financing will require a higher credit score and a bigger down payment, but you’ll likely get better rates and terms than you would with an FHA loan.
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Does your state offer a down payment assistance program? Are there first-time homebuyer grants or initiatives available?
You don’t need to be a mortgage expert to buy a home. But it’s important to understand the basics regarding your options and the pros and cons of each.
5. You’re Financially Prepared for What Lies Ahead
Shopping for and buying the home is the fun part. What isn’t so enjoyable is having your washing machine give out three weeks after closing, or finding your fridge is on the fritz.
The days of letting your landlord deal with repairs and maintenance are gone once you’re a homeowner. When the yard gets unruly, you’re either buying a lawnmower or paying a neighborhood kid. You’re rooting for hailstorms to skip over your street. In short, you’re paying for all sorts of things you didn’t have to before.
They’re sporadic costs, and they’re not always so drastic. But they’re something to consider as part of your homebuying calculus.
By Chris Birk