Am I Ready to Buy a New House? The Questions You Need to Answer

Posted on Mar 16, 2022


The housing market may have been nuts, but the rental market last year wasn't much better. Millions of renters are dealing with the painful 11% average increase to rent and wondering, is it time? Am I ready to buy a new house? 

It’s a big decision, and it’s not the right decision for everyone. Here are some of the things you should consider first about your timeline, budgeting, and the current market.

How to Know You're Ready to Buy a House: Finances

What Do You Need to Qualify for a Mortgage?

Qualifying for a mortgage is essential for most first-time homebuyers, who won't have enough cash to buy a home without a loan. Although there is sometimes wiggle room depending on the type of loan you use/whether you pay in cash, in general, there are a few basics you'll need to hit:

  • At least 3% down payment for conventional loans)
  • A credit score of 620+
  • Proof of steady income 
  • An acceptable debt-to-income ratio (your recurring monthly debt divided by your total income)

To find out more, read How Hard is it to Get a Mortgage? The Home Buyer’s Guide.

Figuring Out Your Future Budget

Meet with a Realtor or mortgage advisor so that you know what your actual budget is - don’t just assume you can figure it out based on your current rent.

Some of what you'll cover will include:

  • The one-third rule. Conventional advice is that people should spend around one-third of their post-tax income on housing. So if your monthly take-home pay is a combined $8,000, then your maximum housing cost is around $2,600 - and that needs to include your mortgage, property taxes, insurance, utilities, and upkeep (like fixing a broken dishwasher). 
  • Don't feel like you have to max out. “I recommend not necessarily buying a house at the maximum amount you're approved for,” says Kristy Runzer, CFO and Founder & CEO of OnRoute Financial. “Consider what the monthly payment will be, including taxes and insurance, before buying a house at the top of your budget. You may find that even if you're approved for a certain amount, making that payment each month will make the rest of your finances feel really tight.” (read more at How to Save for a House: What First Time Home Buyers Should Know).
  • 1% to cover maintenance. Experts recommend setting aside 1% of your home’s purchase price each year to account for home maintenance costs (like calling a plumber or getting a new dishwasher). So if you’re budgeting for a $400,000 home, 1% is $4,000 per year - which equates to $333/month.  
  • Take your new budget for a test run. Experiment with setting aside the money you believe you’d need to cover the additional expenses of owning a home each month (mortgage payment, home insurance, water bills, taxes, etc) and see how easy it is to manage for at least three months. 

"When someone wants to buy a home without knowing the process at all, they often don't know that the closing costs are different from your down payment, or that your credit score has to be favorable. And maybe they don't know that the bankruptcy they had six years ago is going to affect them. So talking to a professional is the best way to figure out when they’re ready to go forward," recommends Diane Winkelman, a buyer agent for the Philadelphia suburbs.

Financial Responsibility

Being a homeowner requires financial responsibility - so if you consistently struggle to pay your bills on time, you're probably not ready to buy a home.

If you’re late on your rent, there are often protections in place to prevent you from getting kicked out - and if you get kicked out, you can often move on with limited financial repercussions. If you fail to pay your mortgage, you could not only lose the equity you’ve built - you can also saddle yourself with a terrible credit rating that makes it harder to rent or buy your next home.

Do you have savings?

Federal law typically requires lenders to wait until the loan is over 120 days delinquent before officially starting a foreclosure - that’s just 4 months. So having savings in place is key for ensuring that even if you hit a road bump - like getting laid off - you’ll still be able to cover your bills. 

Am I Ready to Buy a House? The 5-year Plan

Figuring out a five-year plan for your life is important for the home buying journey. When you buy property, there are closing costs to pay upfront - in addition to whatever you put down for the down payment. 

Closing costs cover necessary services like home inspections, title searches, surveying fees, and more. On average, closing costs account for 5-6% of the home sale (though this percentage can vary depending on where you live).

For this reason, buying a home isn’t a decision you should make lightly, even if you know the home will appreciate in value each year: you’ll be tying up a fair amount of your equity (meaning you can’t as easily spend it on other things you need) and because of the closing costs involved, it’ll likely take a few years to recoup the cost of buying.

Of course, if your plans change, you can always sell your home, or opt to rent it - but then you’ll need to be prepared for the tax, loan, and added responsibilities that come with owning multiple properties/being a landlord.

Having a rough five-year plan will help you find a home that meets both your present and future needs. If you plan to start a family within the next three years, for example, it might not make sense to opt for a one-bedroom condo - even if it works for right now. Similarly, if you work from home now but plan to go into the office more after your promotion, you might want to reconsider buying a home that involves an hour-long commute on a good day.

To recap, understanding your timeline is important because:

  • It takes time to recoup closing costs, etc.
  • Equity will be tied up in your home (not liquid)
  • You want a home that accommodates your future needs

Is it the Right Time to Buy a House?

A lot of people get hung up on trying to time the market. Home prices seem so high right now - surely if I wait, prices will come down! However, experts are predicting home prices will rise at least 7% this year, up to potentially 11% (as noted in Should I Buy a House in 2022? The Answer, Surprisingly, Is Yes.). While this is a more moderate pace than last year’s average of 19%, it’s hardly a reversal. That’s because inventory remains low, while demand from qualified buyers is still high.

"That’s probably the #1 thing I hear from clients. 'Hey, I’m going to stick it out and wait.' Unfortunately, that’s not going to happen - one of the big reasons is that demand is still high for homes. Builders can't build fast enough and rising rent is really going to push people into buying a house," warns Orlando-based buyer agent Jeffrey Colom Ortiz.

In other words, don’t wait for prices to drop if that’s what’s holding you back - because you might end up waiting years for that to happen (if it ever does). And in the meantime, you’ll still be paying off your landlord’s mortgage and watching your rental costs go up every few years.

“If you’re ready to buy, it doesn't matter if it’s a seller's market, if prices are inflated, or if interest rates are all over - because your life dictates you needing this move now. And if you could wait, you would - right?” explains Winkelman. “But if not, we just make the best, most reasonable offer on a house that we can.”

If you’re wondering whether now is the right time to buy a home, keep in mind that:

  • Interest rates are relatively low, but rising (and the lower they are, the more home you qualify for)
  • The average rent is expected to rise 7% this year
  • The average 2-bedroom rental costs $1,958, while the average mortgage payment is $1,275 

Buying a home may also take more time than you think.

“Most people think that once you get pre-approved that you can move in right away, or that it would take six months, but what it comes down to is 3-6 months of looking for a house, then 30-60 days to close on a house,” explains Winkelman, noting that this is one of the most common misunderstandings first-time homebuyers have. “So it may take a lot longer if their finances need to get into order, or if they're not ready to move at the pace of the market.”

Checklist: Are You Ready to Buy a House?

Let's review. How do you know you're ready to buy a home? Although there's not necessarily a "right" or "wrong" time - it all depends if you're ready and willing to make the move - it will definitely help if you have:

  • A basic 5-year plan
  • Cash for closing costs
  • Cash for the down payment (3% minimum)
  • Met with a Realtor
  • Met with a mortgage advisor
  • A decent to high credit score (620+)
  • 2 years of employment history (not a hard rule, but generally desirable)

"Once all of your ducks are in a row - credit, income, and assets - the only time that's right to move is when you're ready," advises Winkelman.

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