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When Am I Financially Ready To Buy A House? (You’ll Have THIS!)

Many people have wondered “When am I financially ready to buy a house?” throughout their lives. And with each generation comes another set of people who are looking to own their homes. But, when is it the appropriate time to buy, and how can you make sure that you can afford it? Here’s what you need to know.

When Am I Financially Ready to Buy a HouseHow do you know when you’re ready to buy a house?

So, how do you know you’re financially ready to buy a house?

Well, you’ll most likely…

  • Be settled into a location where you plan to live long-term
  • Know how much money you have to spend on living expenses
  • Have money stashed away for a down payment
  • Have an emergency fund
  • Have a stable income

While other factors — like a decent credit score and low debt-to-income ratio — are important too, these are the main factors that will let you know if you’re ready to buy a house.

Related: The Ultimate Guide to Save Money When Buying Your First Home

What is the best credit score to buy a house?

Most experts recommend that you have a credit score of 620 or higher, with 620 being the minimum for most lenders. If your score is below 620, conventional lenders may not approve your loan, or you’ll need to pay a higher interest rate, which means higher monthly payments.

Of course, anything in the “excellent” credit range — 800 and up — will most likely get you the best deal. But even a “very good” credit score of 740 to 799 is great too.

Related: How Long Does It Take To Get A 700 Credit Score From 0? (Hint: Less Than A Year!)

Will my credit score go down when I buy a house?

Most likely. Many credit scores will lower by 15 to 40 points after the purchase of a home. This could be due to credit checks, a potential missed payment, or even the loan itself. But also, be sure to review your credit report from the three credit bureaus to confirm there aren’t any mistakes.

How much money should I have in my savings before buying a house?

Besides having a down payment for the house, experts recommend saving 3-6 months of living expenses saved up in this cash reserve. Of course, how much money you should have in your savings depends on you and your lifestyle too.

For example, if you’re living off of a single income, you may want to save more money (in case of job loss or changes). But if you live with a partner, and don’t have much debt, you may be able to get away with just a few months of savings. I recommend saving as much as you can and giving yourself at least 3 months’ worth of expenses. But upwards of a year of savings may be best.

Related: Top 10 Things to Consider When Buying a House

How much is too much house debt?

How do you know if you’re buying too much house?

The Consumer Financial Protection Bureau recommends a debt-to-income ratio below 43%. In other words, if all of your debt combined doesn’t exceed 43%, you should be able to make your monthly payments. Anything higher and you may struggle. This includes your mortgage.
 
So, if you already have a debt-to-income ratio of 20%, you don’t want to get a house whose mortgage payments will exceed 23% of your yearly income. If you don’t have any debt at all, it shouldn’t exceed 43%.
 
But also, keep in mind that the more debt you have, the less you can spend month-to-month.
  • Could you live on 57% of your income for all of your other expenses, including saving and investing?
  • Would you be house poor if you get a mortgage that big?

I recommend a more conservative 30-35%, but this will depend on you.

Related: Buy the Pricey House? Or the Moderate House?

How much house can I affordHow much house can I afford based on my salary?

Experts recommend that your mortgage should be no more than 28% of your pre-tax monthly income.

To find this number, you’ll start by multiplying your income by 28, then dividing that by 100. In other words, if you make $4,000 a month (pre-tax) your mortgage shouldn’t be more than $1,120 a month.

Of course, this depends on if you have any other debts, income coming in from a partner (or side hustles), or have a bigger or smaller down payment. Overall, you should aim for no more than 36% if possible.

Related: How to Know If You Are Ready to Buy a House

Can I buy a house making 40k a year?

Can you afford a house if you earn just $40,000 a year?

It depends.

In areas like New York City or Miami, a $40,000 yearly salary won’t go far at all. But in smaller towns or lower cost of living areas, you could. You would follow the same affordability model listed above, and see what you could afford to pay each month.

$60,000 pre-tax is about $5,000 a month. With that, you could afford a house that costs about $1,400 a month. In this range, you’d be looking for homes that costs around $270k, assuming you can put down a 20% down-payment. With an average 3.5% downpayment, you’d want a home no more than $230k.

Related: How to Buy a House In a Ridiculously Expensive Area

How much house can I afford if I make 3,000 a month?

This will be significantly harder to buy a home, especially if this is the only income that is covering the mortgage. If you want to stick to under the 43% debt-to-income ratio, the max that you could afford monthly is $1,290.

With the average 28%, you’d only be able to pay $840. That can be hard to do in certain housing markets, or if you live in a high cost of living area.

tips for real estate investment successHow much should you put down on a house as a first-time buyer?

What amount should you have as a down-payment?

Experts recommend at least 20% down.

This allows you to qualify for a conventional loan, skip extra insurance payments, and get a head start on paying off your mortgage. However, there are loan options that allow you to put down as little as 3.5%, and even 0% if you’re a veteran.

Related: What’s the Typical House Down Payment?

What happens if you don’t put 20% down on a house?

In most cases, if you don’t put 20% down on your house, you’ll have to pay PMI, or private mortgage insurance (ie. an extra amount per month to the bank each month).

This is to ensure that the lender will still recover some of their costs if you were to stop paying for your home. But keep in mind that if you qualify for a VA loan (as a veteran or military member) you don’t have to pay for PMI, even if you don’t put 20% down.

What is the smallest down payment on a house?

For most loans, the lowest down payment you can make is 3.5% of the home’s value. Both FHA and USDA loans have down payments for as little as 3.5%-5%.

How much does solar energy save each year?Should you pay off all debt before buying a house?

While I will always advocate for less debt or no debt if you can afford it, it’s not necessary to pay it all off before you buy a house. However, the more debt you have, the harder it may be to qualify for a loan, especially if you have a smaller down payment.

At the very least, I recommend paying off most, if not all, of your consumer debt — including credit cards, personal loans, and car loans if you can.

Related: Debt Free by 30? (Absolutely! I Did It! Here’s How!)

Should I pay off my credit card before closing on a house?

I would highly recommend it. For one, it can boost your credit score, which looks good to lenders. And it will help lower your debt-to-income ratio.

But there are more benefits to paying off your credit card too, including having less payments coming out of your wallet each month. And, they can also count as an extra back up if you need emergency funds to fix home issues.

Related: FREE Credit Card Payoff Spreadsheet (Get Out of Credit Card Debt in 2022!!)

What should you not do when getting a mortgage?

While there are many things you can and should do, there are a few things you should not do while trying to get approved for a mortgage.

These include…

  • Applying for new credit — this could lower your score and alter your home loan deal
  • Missing payments – this could lower your score
  • Making large purchases – this could lower your cash in hand, which you may need during closing or when first moving in
  • Switching jobs – this could affect your home loan deal

While some of these things may be out of your control, try to stay away from more debt and change in finances until your loan is secured.

Related: 12 First Time Homebuyer Tips For 2022 (Don’t Buy A Home Without This!)

What To Do When Getting Ready To Buy A House

Now that we’ve answered your question of “When am I financially ready to buy a house?” let’s talk about how to actually prepare to buy a house.

Start Saving

First, it’s important to start saving as much as you can. Not only should you have a down payment (at least 3.5%), but you should also save for a few other upcoming costs too. These include closing costs (around 2-5% of the loan), and move-in expenses (like a rental truck, new furniture, etc).

This could mean upward of $10,000 to $25,000, and that’s on the low end. And of course, you also want to have an emergency fund in place.

Related: Hidden Savings: Lesser Known Ways You Can Save Money

buying your first homeFigure Out What You Can Afford

Once you’ve started saving or have your money in place, now is the time to figure out what you can afford. You can use the formula we talked about above, or play around with a calculator on a site like Zillow to see what you’d feel comfortable with.

No matter what you choose to do, I highly recommend trying to find a home that doesn’t costs more than 30% of your pay. This will give you some wiggle room with other bills and expenses (and allow you to actually go out and have fun vs. being chained to your home mortgage for life!).

Related: Becoming Debt Free on a Low Income (It’s Possible! I Did It!)

Know Your Credit Score

Do you know your credit score?

Since it’s important to lenders, you should.

Your credit score will determine whether you qualify for a mortgage and your interest rate, so the higher, the better.

  • First, you’ll want to check your credit score with all three credit bureaus — Experian, Equifax, and TransUnion.
  • If your score is low or mediocre, focus on raising it.
  • To raise your score, pay your bills on time, pay down debt, and keep all current credit cards open to keep your available credit.
  • If your credit score is great, try to keep it that way. Don’t open up any new credit cards or loans, and keep an eye out for fraud.

Related: What is the Average US Credit Score? (…and how to see yours for FREE!!)

Get Pre-Approved for Your Home Loan

Next up, you’re ready to get pre-approved! Once you know which mortgage option you could qualify for (FHA, USDA, VA, or conventional), you’ll want to choose lenders that offer those options. From there, you’ll want to apply for a mortgage preapproval.

A preapproval letter is the lender’s offer to loan you a certain amount under specific terms. This shows that you’re a serious buyer and can qualify for a loan.

Keep in mind that the lender will need to pull your credit, verify your income and assets, and check over your debt. However, applying for preapproval with different lenders shouldn’t hurt your credit score — be sure to do them all in a limited time frame (for example, all in the same month). 

Related: Buying a House? What Type of Mortgage Loans Are Best?

Compare Lenders

Once you’ve reached out to multiple lenders, see which lender may be right for you. Look at the costs, interest rates, and other fees like origination fees.

  • Which lender offers the better deal?
  • Which one makes the most sense for you financially?

That’s the lender you want to work with. 

Related: Buying a New House? Be Wary of Hidden Costs

When Am I Financially Ready To Buy A House? You’ll Know!

So, do you know the answer to the question “When am I financially ready to buy a house?” yet? Basically, you’re financially ready when you can afford the mortgage payments, and other “emergencies” that may pop up, on your salary.

This doesn’t mean you have to be completely debt-free or making multiple 6-figures a year. It simply means you’ll know how to manage your money and make owning a home work for you.

So, based on what we’ve talked about, are you financially ready to buy a house?

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AUTHOR Kimberly Studdard

Kim Studdard is a project manager for online entrepreneurs and small businesses. When she isn't spending time with her daughter and husband, or reading her growing pile of horror books, you'll find her working on her HR degree and working towards FIRE.

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