Methods to know if you happen to can afford to purchase a house on this loopy actual property market
Estimated read time: 5-6 minutes
To keep paying rent or to buy? That’s the age-old question of prospective homeowners grapple with as they keep tabs on the real estate market. While Realtor.com expects Utah’s home prices to rise 8.5% in 2022, interest rates are also climbing — which means waiting to buy could make things more expensive.
If you’re feeling the push to buy a home sooner rather than later, you’ve no doubt wondered if purchasing a home is even feasible in the current market. Perhaps a better question is how much home can you buy? While a $1 million home could be out of reach, a $450,000 home may be perfectly reasonable.
But there are other factors to consider before you make one of the biggest purchases in your life. Here’s how to gauge whether this is a good time for you to buy a home.
You have a stable source of income
It’s generally a good idea to avoid making several major life decisions simultaneously. So, if you’re currently contemplating making a jump from one career to another, now may not be the best time to buy a house. Also, if you’ve barely started a new job, that might be a tricky time to qualify for a loan as well. Though it’s not a hard-and-fast rule, lenders typically require two years of employment to qualify for a mortgage. The Mortgage Reports says there are ways around this, but having a stable source of income is definitely preferred.
You have a lower debt-to-income (DTI) ratio
While your income shows that you’ve got the money to pay back a loan, your debt-to-income (DTI) ratio reflects the likelihood that you’ll actually do it. Your DTI ratio measures the amount of your gross monthly income that you use to pay your debts each month. (These debts may include mortgage payments, rent, credit cards, student loans, auto loans, child support or any other type of debt.)
According to Investopedia, most lenders typically won’t work with a DTI ratio that’s higher than 43%, but this can vary. Here’s how to calculate your DTI ratio: Add up all of your debts and divide by your gross monthly income. (For example, if you have $2,000 in monthly debts and $6,000 in gross monthly income, your DTI ratio would be about 33%.)
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Your credit score is good
The good news is that you don’t have to be completely debt-free to buy a home — but you do need to have decent credit. After all, you’re borrowing a large sum of money from a lender and they need good reason to believe you’ll pay them back! While the numbers may vary slightly, NerdWallet reports that a fair credit score is between 630 to 689, a good score is 690 to 719 and anything above that is excellent.
If your credit score isn’t in the “good” range, there are things you can do to boost the number. Investopedia recommends getting in the habit of paying your minimum balance due on time and paying down your balance so you can keep your overall credit use low. (In other words, don’t max out your credit cards if you can help it.)
It’s also a good idea to avoid applying for multiple new cards at once. Depending on your financial situation, you could start seeing your score improve in as little as one month!
You’ve considered more than just the purchase price
Your mortgage payment is only going to be a portion of what you’ll owe on your home each month, so don’t max out your budget on that number alone. You’ll also need to have money for things like utilities, homeowners insurance and homeowner’s association fees (if applicable). These expenses can easily require a few hundred dollars more out of your pocket each month.
Also be aware that if you put down less than 20% on your home loan, you’ll need to pay for private mortgage insurance (PMI). This protects the lender if you can’t pay back the loan. The Urban Institute notes that PMI can range from 0.58% to 1.86% of the loan amount, so this number can definitely add up.
You won’t be clearing out all of your savings for a down payment
While a 20% down payment on your home is ideal, you should know that it’s not required. Most first-time homebuyers don’t have 20% of the purchase price on hand. (The National Association of Realtors reported that 69% of first-time buyers put down less than 20% in March 2022.)
The government offers programs for first-time buyers to purchase a home with 0% down, but your minimum down payment depends on what type of loan you’re taking out. According to Bankrate, a conventional loan may require as little as 3% down, but this depends on your lender.
It’s also important to realize that buying a home usually necessitates other expenses like buying furniture, adding landscaping or doing some remodeling. If making that minimum down payment clears out all of your savings, it’s probably a good idea to wait before purchasing a home.
Your monthly payment will be manageable
If you’re planning on buying a $450K home, and you have a household income of $70K, your monthly payment could be as high as $2,200. That may be more expensive than your rent, but as long as you keep your debt payments around 30% of your income, they should be manageable.
Consider that rental rates are going up with the real estate market as well. When you buy a home with a fixed interest rate, you lock your monthly payment in. You won’t have to worry about those payments going up like a renter would. If your interest rate is higher than you would like, you can always refinance your loan when rates come down again.
Beat the competition with Homie Cash
If you’ve checked all the boxes above but you’re still not convinced you can find a home in today’s market, check out Homie Cash. Many buyers get into bidding wars in this market, and Homie cash can help. With Homie Cash, you can make a competitive offer on the home you love and close in as little as 21 days. To learn more, visit homie.com/cash.
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