How to know if you can afford to buy a house in this crazy real estate market
Estimated reading time: 5-6 minutes
Continue to pay the rent or buy? It’s the age-old question future homeowners face as they watch the real estate market. While real estate agent.com expects Utah home prices to rise 8.5% in 2022, interest rates also rise – meaning waiting to buy could make things more expensive.
If you feel pressured to buy a home sooner rather than later, you’ve probably wondered if buying a home is even feasible in today’s market. Perhaps a better question is how much house can you buy? While a $1 million house might be out of reach, a $450,000 house may be perfectly reasonable.
But there are other factors to consider before making one of the biggest purchases of your life. Here’s how to assess whether it’s the right time for you to to buy a house.
You have a stable source of income
It’s generally a good idea to avoid making several important life decisions at the same time. So, if you’re currently considering a career move, now might not be the best time to buy a home. Also, if you have just started a new job, it can also be difficult to qualify for a loan. Although not a hard and fast rule, lenders generally require two years of employment to qualify for a mortgage. Mortgage reports says there are ways around it, but having a stable source of income is definitely better.
You have a lower debt-to-income ratio (DTI)
While your income shows you have the money to repay a loan, your debt-to-income ratio (DTI) reflects the likelihood that you will actually do so. Your DTI ratio measures how much of your gross monthly income you use to pay your debts each month. (These debts can include mortgage payments, rent, credit cards, student loans, car loans, child support, or any other type of debt.)
According to Investopedia, most lenders generally won’t work with a DTI ratio above 43%, but it can vary. Here’s how to calculate your DTI ratio: Add up all your debts and divide by your gross monthly income. (For example, if you have $2,000 in monthly debt and $6,000 in gross monthly income, your DTI ratio would be around 33%.)
Your credit score is good
The good news is that you don’t need to be completely debt free to buy a home, but you do need to have decent credit. After all, you are borrowing a large sum of money from a lender and he needs a good reason to believe that you will pay it back! Although numbers may vary slightly, NerdWallet Reports that a good credit score is between 630 and 689, a good score is 690 to 719, and anything above that is excellent.
If your credit score is not in the “good” range, there are things you can do to increase the number. Investopedia recommends making a habit of paying your minimum balance due on time and paying off your balance so you can keep your overall credit usage 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 several new cards at once. Depending on your financial situation, you could start seeing your score improve in as little as a month!
You considered more than the purchase price
Your mortgage payment will only be a portion of what you’ll owe on your home each month, so don’t limit your budget to just that number. You’ll also need money for things like utilities, home insurance, and homeowners association fees (if applicable). These expenses can easily demand a few hundred dollars more out of your pocket each month.
Also be aware that if you put less than 20% on your mortgage, you will have to pay private mortgage insurance (PMI). This protects the lender if you cannot repay the loan. the Notes from the Urban Institute this PMI can vary from 0.58% to 1.86% of the loan amount, so this number can certainly add up.
You won’t empty all your savings for a down payment
Although a 20% down payment on your home is ideal, it is not mandatory. Most first-time home buyers don’t have 20% of the purchase price on hand. (The National Association of Realtors report that 69% of first-time buyers deposited less than 20% in March 2022.)
The government offers programs that allow first-time buyers to buy a home with 0% down payment, but your minimum down payment depends on the type of loan you take out. According to The bank ratea conventional loan may require as little as 3% down payment, but that depends on your lender.
It’s also important to realize that buying a home usually requires other expenses like buying furniture, adding landscaping, or doing renovations. If that minimum down payment wipes out all of your savings, it’s probably a good idea to wait before buying a home.
Your monthly payment will be manageable
If you plan to buy a $450,000 home and your household income is $70,000, your monthly payment could be as high as $2,200. It 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 also increase with the real estate market. When you buy a house with a fixed interest rate, you lock in your monthly payment. You won’t have to worry about these payments increasing like a tenant would. If your interest rate is higher than you would like, you can always refinance your loan when rates come back down.
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If you’ve checked all the boxes above but are still not confident you can find a home in today’s market, check out Home Cash. Many buyers engage in bidding wars in this market, and Homie Money 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.