Homeownership provides many Americans with the best way to build their wealth and provide security in their retirement years. However, you need a lot more than just a down payment to purchase a home. You need a solid credit rating and enough liquid cash to pay for unexpected expenses. Plus, your all-important debt-to-income ratio must show you can handle borrowed funds responsibly.
Considering that a house provides its own collateral, you would think it would be easy to achieve this particular part of the American dream. However, lenders learn from mistakes and make home-buying difficult for good reason — they don’t want to eat the financial loss if you don’t pay. Assuming you’re ready to take the big plunge into homeownership, here’s how to pick the best time to buy a house.
When You’re In a Good Place with Debt
Assuming you’re not strolling into an open house with a suitcase full of Benjamins, you’ll need to have some previous debt to qualify to buy a house. You can’t owe too much, though, or your debt-to-income ratio might hurt your qualifications even if you’ve never missed a rent payment in your life.
Lenders like to see that you’re capable of paying back what you borrow. The occasional late credit card payment won’t necessarily lead to a rejection, but a ton of debts written off as non-collectible will. Before you even sit down with a lender — preferably before you raise a curious eyebrow while cruising past a “for sale” sign — get your free credit report first.
Once you receive your report, address any discrepancies with all three major bureaus. If you’re running short on time to do so, you can hire a third-party credit repair company. Pay down and pay off as much as you can, especially federal loans like student loans. A credit rating around 600 may get you a mortgage, but you’ll deal with potentially higher interest rates.
When Your Job Is Stable
Owning a house is a big deal, so it’s not a responsibility you’ll want on your shoulders if you don’t feel settled in your area. Renting allows you the flexibility to move easily if you need to pursue new opportunities. Naturally, then, the best time to buy a house is when you’re planning to stick around for a while.
There’s more than your lifestyle to consider, too. While not a set-in-stone requirement, most lenders like to see at least one year of employment with your company prior to approving a mortgage. Self-employed individuals will need to produce two to three years’ worth of prior tax returns to verify their income.
If you’re buying as part of a couple, you have some choices. Couples seeking to buy together don’t necessarily need to show the income of both partners unless necessary to bump their debt-to-income ratio into the green light stage. Someone earning $30,000 per year with $15,000 remaining in student loans may not qualify, but if their partner makes $60,000 and carries less than $1,000 in debt, buying a house may become an easier process.
When You Have Adequate Savings
When the refrigerator in your rental goes on the fritz, you simply get on the phone with the landlord to arrange a repair. When you’re the homeowner, these costs rest squarely on your own shoulders. Yes, you want to put as big a down payment as possible, but leave some in the emergency account to cover the unexpected.
Financial experts recommend having adequate liquid savings to cover six months’ worth of lost income. This becomes particularly critical when buying a house, as repair costs can crop up unexpectedly. Setting up separate savings accounts — one for emergencies and one for a down payment — costs nothing in most cases and can simplify your financial planning.
Likewise, consider whether it’s worthwhile for you to invest in a quality home warranty. While you may feel tempted to omit appliances to save a few bucks on coverage, a new hot water heater or oven can cost hundreds, while many warranties have copays as low as $75.
When Interest Rates Fall
Even seemingly tiny differences in interest rates can impact the amount you pay overall. Yes, you can still refinance later to lower your rate, but that involves paying additional fees. While market fluctuations usually regulate themselves over time, why pay more than necessary each month while you wait for rates to drop again?
Currently, mortgage interest rates remain low, but today’s bargain rates likely won’t last forever. Keeping an eye on market rates can help you determine if this is really the best time to buy a house. This doesn’t mean you should abandon your dreams of home ownership if interest rates climb, but it’s something to consider if you’re looking for the best long-term deal.
When the Local Market Looks Right
Market conditions are hard to time perfectly, but some research can help you decide whether it’s the right time to undergo the home buying process. Housing markets are variable, but there are a few steps to figuring out where your local market currently stands.
First, check out the listings in your region. Do they seem to be getting sold quickly, or are houses sitting on the market for a couple of months? This can help you determine how competitive the process is right now. If it’s currently a seller’s market, then you’ll likely be dealing with higher bids than you would in a buyer-friendly market.
A little innate local knowledge can help you determine when to buy a house, too. If your locale is seeing seemingly endless growth and rising housing prices, like San Francisco, then it might be better to dive in now rather than waiting for rates to climb higher. But if you know the market is seasonal or relaxed, then you might feel comfortable waiting a few months for the market to hopefully turn in your favor.
A good Realtor will likely have the experience and knowledge to help you gauge the market. But remember that even the experts struggle to predict economic conditions, so the best time to buy a house might just come down to when you’re personally ready for the process.
The Best Time to Buy a House
Few things in life feel as rewarding as the moment your real estate agent hands you the keys to your new house. Make sure that joy remains for years to come by practicing due diligence in determining when to buy a house. When your lifestyle, your finances and market conditions all align, it’s a happy occasion.
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