Tired of sending money to your landlord each month? Wish you could renovate your living space whenever you’d like? Or maybe you’re ready for the big backyard and spacious front porch.
Whatever the reason, you’re itching to ditch the rental life and buy your home. But how do you know if you’re financially ready?
Buying a home and paying a mortgage each month is a big financial responsibility. And if you take on more than you can afford and
can’t make your monthly mortgage payments? You might lose your home to foreclosure and send your three-digit credit score plummeting by 100 or more points.
Here are five signs that you are financially ready to take on the responsibility of owning a home.
Signs You Are Ready to Ditch the Rental Life
1: You’ve built up a nest egg of savings
The most important asset when buying a home? Money.
Buying a home is expensive. The National Association of REALTORS® said that in May of 2023, the
median price of an existing home stood at $396,100. For a house with that price tag, you’d need $19,805 for a down payment of 5%. And if you want an even higher down payment of 20%, one that would allow you to avoid paying for private mortgage insurance? That requires $79,220.
The monthly mortgage payment for a home with that price tag is high, too. Say you come up with that 5% down payment of $19,805 on a home costing $396,100. That would leave you with a mortgage of $376,295.
If you took out a 30-year, fixed-rate mortgage for $376,295 with an interest rate of 6.5%, you'd pay $2,378 monthly on principal and interest. That doesn't even include what you'd pay for property taxes and homeowners' insurance, costs that most lenders require you to add to your monthly mortgage payment. If you pay $500 monthly for property taxes and $100 for homeowners’ insurance, you will pay $2,978 monthly just to live in your home.
You’ll also need to save money for
closing costs, the fees lenders and third-party providers charge for originating your mortgage. These fees typically run from 3% to 6% of your total loan amount. For a loan of $376,295, you can expect to pay from about $11,288 to $22,577 in closing costs.
Finally, many mortgage lenders want you to have enough savings after paying for closing costs and your down payment to cover two monthly mortgage payments. If your payment is $2,978, you’d need at least $5,956 in additional savings, not counting the money you’ve saved for your down payment and closing costs.
In this example, you’d need at least $37,000 in savings to comfortably buy a home.
And this doesn’t include any money you’ve saved for an emergency fund, another necessity if you want to buy a home.
2. You’ve built an emergency fund
An
emergency fund is a stash of money that you can pull from to cover unexpected expenses, such as major car repairs or a surprise medical bill.
Most financial experts say you should have enough money in your emergency fund to cover three to six months of daily living expenses. Make sure you’ve hit this goal before buying a home.
You don’t want to get into your home only to have your car’s transmission conk out. If you don’t have an emergency fund, you might have to resort to putting those repairs on your credit card, which could put you in a financial hole. If you’ve built an emergency fund, you can pay for those repairs in cash.
To determine how much you need in your emergency fund, first estimate your required monthly expenses. These expenses should include your mortgage payment, healthcare costs, transportation costs, food costs, utility bills, and required monthly debt payments.
If these expenses total $4,500 a month, you’d need an emergency fund of $13,500 to $27,000, depending on whether you want your fund to cover three or six months of daily living expenses.
If you haven’t built an emergency fund? Make it a priority. Save the money for this fund before you start saving for buying a house. You shouldn’t ditch the rental life until you’ve built a financial cushion to handle life’s inevitable financial emergencies.
3. You’ve built a strong credit score
Your FICO credit score is a key number when you apply for a mortgage. The higher it is, the more likely you are to not only qualify for a mortgage but one with a lower interest rate, which will give you the lowest monthly payment.
FICO scores range from 300 to 850, with lenders considering a score of 800 or better to be an excellent one. The closer your score is to that number, the greater your odds of qualifying for a mortgage with a low interest rate.
What is your credit score? You can order it – this isn’t free -- from one of the three national credit bureaus of Experian, Equifax, and TransUnion. Your credit card providers or bank might also provide you with a free version of your credit score. These free scores might not be the same ones that your mortgage lender uses but will still give you a good idea of whether your credit is strong or weak.
If your score is below 640, that’s a sign that you’re not yet ready to buy a home. Even if you qualify for a mortgage with a lower score, you’ll pay more interest, making owning a home more expensive.
It’s better to continue renting until you can boost your score. Fortunately, improving a credit score isn’t complicated. Pay your bills on time monthly and pay down as much of your credit card debt as possible. Taking these two steps will slowly, but steadily, improve your score. And once your score is above 700? That’s a better time to apply for a mortgage.
4. You pay your bills on time
Do you struggle to pay your student loan, auto loan, or credit card bills by their due dates? Do you often forget to send your rent check to your landlord on time? If so, you might not be ready to take on the responsibility of a monthly mortgage payment.
If you’re already struggling to pay your monthly bills, this might not be the time to add another large payment to your life. Missing mortgage payments can have serious consequences: Skip payments altogether, and your lender can start foreclosure proceedings against you. This can result in you losing your home, devastating your credit score.
But if you pay your bills on time each month and you’ve done this for several years? That signifies that you’re financially responsible and can handle a monthly mortgage payment.
5. You’re ready to put down roots
Have you found a neighborhood that you love? Is your job stable? Are you starting a family? These are all signs that you’re ready to put down roots in a community. And one way to do this is by purchasing a home.
Buying a home also allows you to build wealth, but only if you stay in it long enough.
When you buy a home, you get the chance to build equity. Equity is the difference between what you owe on your mortgage and what your home is worth. If your home is worth $350,000 and you owe $250,000 on your mortgage, you’ve built $100,000 in equity.
You can borrow against this equity in the form of home equity loans, using the funds from these loans to cover home renovations, pay down high-interest-rate credit card debt, add a second bathroom to your residence, or anything else you’d like. Significant equity also helps boost your profits when you sell your home.
To build equity, it helps to stay in your home for several years, at least five to seven. That’s why it makes sense to buy a home when you’re ready to stay put in a community. Selling a home is also a long process. It makes sense only to buy if you’re committed to staying in a neighborhood for several years.
If you’re still not ready to commit to a community or if your job might send you traveling across the country? You might consider renting until you gain more stability in your life.
