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Published On: Wed, May 8th, 2019

Am I Ready to Buy a House? A Guide for Millennials

Whether you rent an apartment or still live with your parents, you may ask yourself, “Am I ready to buy a house?” With renting costs soaring, buying a home can be appealing and give you the privacy and freedom you desire.

If you’re a millennial considering buying real estate, you’ll need to do a thorough examination of your financial obligations, income, and goals to determine if you’re ready to buy a house. You might find you’ve got the green light to move ahead, or you might need to take some additional steps to prepare.

So, when are you ready to buy a house exactly? Read on to learn the questions you should ask yourself to make this important decision.

photo/ mohamed Hassan

Do You Have a Lot of Current Debt?

If you’re wondering how to know when to buy a house, taking a look at your current debt is a good first step.

Adding a monthly mortgage payment can cause major financial problems if you already are struggling to pay your student loans, car payment, and credit card bills. If you owe a lot and can’t pay down some of these debts, then you might need to work on paying down debt before you try to buy a home.

Also, your lender will be looking at your existing debt to calculate your debt-to-income ratio. If your total monthly debts (including your new mortgage payment) would exceed 50 percent, you’ll likely have a tough time getting a mortgage in the first place.

What Does Your Credit Score Look Like?

Even if you’re debt-free, a bad credit score can keep you from being able to buy a house or make it more costly in the form of higher interest charges.

Use a free service like Credit Sesame or Credit Karma to pull your credit report and see your current score. Depending on the loan program you choose, you’ll likely need a minimum score of 580 to 620 to qualify for a mortgage, and you’ll see the best rates if your score exceeds 720.

A low credit score can indicate that you’re not ready to buy a house just yet. Taking steps like paying down existing debt, resolving delinquencies, and avoiding charging to your credit cards can help raise your score to an acceptable level.

Is Your Income Sufficient and Stable?

A lender won’t give you a mortgage unless your income is sufficient to pay the monthly payment, and a lower income means you might not be able to buy the type of house you want.

Take a look at your monthly cash flow to estimate how much free cash you have after considering all expenses. You can then use a home affordability calculator to estimate how big of a mortgage payment (and how expensive of a home) you can afford given your income and expenses.

Keep in mind, though, that thinking you can afford the payment isn’t enough to know when to buy a house. Your lender will be looking that your total house payment doesn’t exceed 28 percent of your income. This might mean buying a cheaper house or putting more money down.

Do You Have Enough Money Saved?

Unless you’re a veteran applying for a VA loan, you’ll need to make a minimum down payment of 3 to 3.5 percent of the home price, and those with lower credit scores may need 10 percent. This would mean having at least $3,000 to $3,500 saved for a $100,000 home with good credit and a much larger $10,000 with poor credit.

Even if you save up these amounts, you’ll still have to pay the extra monthly expense of private mortgage insurance unless you put 20 percent down. Therefore, the more money you can put down, the better off you’ll be in the long run. Not only can you avoid the PMI, but you’ll pay less in interest over the length of your loan.

Also, you’ll likely have closing costs to pay, and these can run 2 to 5 percent of the home’s price – possibly as big as your down payment. It is possible to have the home seller pay for some of your closing costs, but be prepared with the money ready anyway to avoid a big surprise.

At the same time, you will need to have extra cash reserves saved to pay for unexpected expenses or to deal with unexpected unemployment. Lenders like to see at least a couple months’ worth of mortgage payments saved up, and having a six-month emergency fund that would pay for all your expenses is even better.

If you don’t have enough cash for both your down payment/closing costs and a sizable emergency fund, this indicates you’re not ready to buy a house and should start saving more money instead.

Does Buying a Home Make Sense for Your Future Goals?

Having a clear picture of your future goals is also a good way to know when to buy a house. Ideally, you’ll know the type of home you desire and be ready to settle down and live in the same place for many years. You’ll also want to be ready to handle the responsibilities of a homeowner.

If you’re the kind of person who wants to be able to move around often or not limit yourself to jobs in the area, buying a house may not be a good choice. While it would be possible to sell, you’d likely not recoup the down payment and closing costs if you move out just a couple years later. Renting can be a good alternative for this situation.

You’ll also want to think about whether you plan to expand your family since you’ll increase your expenses with a new child. This could make paying your mortgage payment even more difficult.

Do You Understand the Home Buying Process?

If you’re not sure how the home buying process works, it’s recommended to do some more research before you decide to buy a house. When you have your finances in order and feel that buying a home fits your goals, reach out to professionals such as real estate agent, lenders and real estate attorneys to get any questions answered.

You’ll want to start with a lender first to obtain a pre-approval and know exactly how much home you can afford. Then, you can work with a real estate agent who can discuss your home preferences, find suitable properties, and help you draft an offer.

A real estate attorney can be a good asset after you sign a home offer. This useful link discusses the benefits of an attorney’s guidance during the closing process.

So, Am I Ready to Buy a House?

If your financial profile passes all the tests discussed and you’re ready to settle down as a homeowner, then you might be ready to start the journey to becoming a homeowner. Congrats!

You know the answer to “Am I ready to buy a house?”

But even if you still need to save money, pay down debt, or raise your credit score, don’t worry. You might still find it helpful to reach out to a lender who can discuss the biggest issues of concern and offer suggestions to help you.

Now we’ve answered, “How can I know if I can buy a house?” If you are interested in more helpful business content, check out our blog.

Author: Laura Brown

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