When to Buy and When to Wait
It makes sense that you’d want to move up to homeownership. Owning a home gives you the chance to build wealth. If your home increases in value while you own it, you can sell it for a profit when you’re ready.
You can also build equity in your home – the difference between what you owe on your mortgage and what your home is worth – and borrow against it in the form of low-interest-rate home equity loans or lines of credit.
Owning a home comes with more financial stability, too. With many mortgage types, your monthly home loan payment will remain mostly the same each year, depending on whether your homeowners’ insurance or property tax bills increase. You won’t need to worry about a landlord increasing your rent payments each year.
Even with these benefits, though, owning a home isn’t right for everyone at every time. You might be a good candidate for homeownership, just not right now.
What are some signs that it makes more sense to wait to buy a home? Here are some of the main ones:
Your credit score is low: Lenders look at your three-digit FICO credit score when you apply for a mortgage. The higher it is, the more likely you are to qualify for a loan with a lower interest rate. A lower rate means your monthly payment will be lower, too.
To qualify for the lowest rates, you’ll typically need a credit score of 740 or higher. If your score is much lower than that? It might make more sense to wait until you can improve it before you buy a home.
Fortunately, improving your credit score isn’t complicated. Pay your recurring bills on time each month and pay off as much of your credit card debt as you can. Take these two steps, and your credit score will gradually improve.
You don’t have much savings: Buying a home is expensive and requires a lot of savings. You’ll need a down payment, which is expensive. A down payment of 5% of a home costing $250,000 is $12,500, a lot of money to save.
You’ll also need to pay closing costs, which can run from 3% to 6% of your total loan amount. If you are borrowing $240,000, your closing costs could range from $7,200 to $14,400.
Lenders also prefer that you have enough savings after these costs to cover at least two months of mortgage payments.
As you can see, you’ll need a lot of savings to buy a home. If you don’t have much money in your bank accounts? Consider waiting to buy until you’ve bulked up those funds.
You have too much debt or too low a monthly income: Lenders prefer that your total monthly expenses – which they consider your estimated new mortgage payment, minimum monthly credit card payment and student, auto and personal loan payments – equal no more than 43% of your gross monthly income.
If your debt-to-income ratio is higher than this? You might struggle to qualify for a mortgage at a lower interest rate. Again, it might make sense to wait to buy until you can pay down some of your debts or you can boost your monthly income.
Of course, every situation is different, and markets can vary. Bottom line? Talk to real estate and financial professionals to set your goals—and obtain advice on how to get there.
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