When Should You Buy a House?

We would all love to go back in time and buy a house when prices were at the bottom; however, we cannot travel back in time, and no one knows where the bottom is until it passes. How do you know the right time to buy? 

If you are thinking of putting off buying a house, prices might go down again, but they could also go up. The biggest reason I think it is still a great time to buy is the incredibly low-interest rates that are available. 

I remember when we all thought 7 percent was a great rate for a mortgage. With most mortgage rates below 5 or even 4 percent, low payments are still well within your reach. Rates may go up soon, but much of that will depend on the economy and how well it does.

If you are considering buying a home, discover what “affordability” means before you make a decision. A number of factors must be taken into account, including debt-to-income (DTI) ratios and mortgage rates. Learn more about the complete costs of buying a house.

Understand Your Debt-to-Income Ratio First

Money is the most obvious decision point. You can certainly afford to buy a house now if you have the financial means to buy one for cash. If you can qualify for a mortgage on a new home, even if you don’t pay cash, you can afford the purchase. How much mortgage can you afford?

As a guideline for mortgage approval, the Federal Housing Administration (FHA) generally uses a debt-to-income ratio of 43%. Whether the borrower can make their payments each month depends on this ratio. Based on the real estate market and the general economy, some lenders may be more lenient or rigid.

A 43% DTI means you should not exceed 43% of your gross monthly income with all your regular debt payments, plus housing-related expenses—mortgage, mortgage insurance, homeowners association fees, property taxes, homeowners insurance, etc.

To calculate your debt payment amount, you multiply your monthly gross income by 0.43, which is $1,720. Suppose you already have these monthly obligations: $120 for your credit card payments, $240 for your car loan, and $120 for student loans. 

That’s a total of $480. Accordingly, you can afford an additional $1,240 per month in debt for a mortgage and still fall within the maximum DTI. The lower your DTI, the better.

What Mortgage Do Lenders Want?

Also consider your front-end debt-to-income ratio, which compares your income to your monthly debt from housing expenses alone, such as mortgage payments and mortgage insurance.

Typically, lenders prefer that ratio not to exceed 28 percent. In the example above, if your monthly income is $4,000, you would find it difficult to qualify for $1,720 in housing expenses even if you have no other obligations. You should have housing costs under $1,120 for a DTI of 28%.

If you do not have any other debt, why can’t you use your full debt-to-income ratio? Creditors do not like it when you live on the edge. You lose your job, your car is totaled, and you become disabled and unable to work for a while. In that case, you wouldn’t have any wiggle room for when you want or have to incur additional expenses.

A mortgage is usually a long-term commitment. Don’t forget that you may be making those payments every month for the next 30 years. You should therefore examine whether your primary source of income is reliable. Consider your prospects for the future, as well as whether your expenses will increase over time.

Can You Afford The Down Payment?

In order to avoid paying private mortgage insurance (PMI), you should put down 20% of the home’s value. For every $100,000 borrowed, PMI can add $30 to $70 to your monthly mortgage payments.

Your purchase may not require a 20% deposit for some reasons. It is possible that you won’t live in the home very long, you plan to convert the property into an investment property, or you don’t want to risk putting down that much money. In that case, you can still buy a home without 20% down. Using an FHA loan, for example, you can put down only 3.5%, but there are benefits if you put down more. The advantages of a larger down payment go beyond the aforementioned avoidance of PMI:

  • Smaller mortgage payments: if you borrow $200,000 at 4% for 30 years, your monthly payment would be $955. You’d pay $859 if your mortgage was $180,000 with a 4% interest rate over 30 years.
  • Lenders offer you more choices-some lenders won’t lend you a mortgage unless you put down 5% to 10%.

In the long run, affordability is more important than your ability to buy a new house today.

The Housing Market

Once you have a handle on your finances, the next factor to consider is the housing market – either in your current locality or the one you plan to move to. Housing is an expensive investment. It’s great that you have the money to make the purchase, but that doesn’t answer if it makes financial sense.

To do this, answer the question: Is renting cheaper than buying? A strong argument in favor of buying is if buying is less expensive than renting.

It’s also important to consider the long-term implications of purchasing a home. Homeownership was almost a sure way to make money for generations. The home your grandparents bought 50 years ago for $20,000 could be worth five or ten times as much thirty years later. Traditionally, real estate has been considered a safe and reliable investment, but recessions and other disasters may make would-be homeowners reconsider.

When the housing market crashed during the Great Recession in 2007, many homeowners lost money and ended up owning houses that were worth far less than when they were purchased. You should factor in the cost of interest on your mortgage, upgrades to the property, and ongoing maintenance into your calculations if you are purchasing the property on the belief that its value will increase over time. Learn more about whether you should rent or buy a home.

The Economic Outlook

In the same vein, there are years when real estate prices are depressed and years when they are abnormally high. You may want to consider your purchase if the price is so low that it’s obvious you’re getting a good deal. 

Prices that are depressed in a buyer’s market increase the chances that time will work in your favor in the future and cause your house to appreciate. During the COVID-19 pandemic, we may see home prices drop due to its dramatic impact on the economy if history repeats itself.

Interest Rates

The size of a mortgage payment is heavily influenced by interest rates, and there are years when they are high and years when they are low. On a $100,000 loan at 3% interest, a 30-year mortgage will cost $422 per month. You will have to pay $537 per month if the interest rate is 5%. If the interest rate is 7%, you will have to pay $665 each month. It may be a good idea to wait before buying if interest rates are falling. You should make your purchase as soon as possible if they are rising.

Time of Year

The seasons play a role in decision-making as well. If you intend to shop for a house in the spring, you will have a wide variety of options to choose from. One of the reasons is related to the target audience of most homes: families waiting to move until the current school year ends, but wanting to settle in before the new year begins.

Winter may be a better time for house hunting (especially in cold climates), or the height of summer for tropical states (i.e., the off-season for your area), if you are looking for sellers with less traffic. The inventory may be smaller, so choices may be limited, but sellers are unlikely to see multiple offers at this time of year.

It’s also worth noting that some savvy buyers like to make offers around holidays, such as Christmas or Easter, in the hopes that the unusual timing and lack of competition will pave the way for a quick and fair deal.

Consider Your Lifestyle Needs

Money is important, but many other factors can influence your timing. An upcoming baby or an elderly relative who can’t live alone? Do you need more space soon? Will your kids be changing schools during the move? Will you have to pay capital gains tax if you are selling a house you have lived in for less than two years? If so, is it worth waiting to avoid the tax?

You may enjoy gourmet cooking, weekend getaways, the performing arts, or working out with a personal trainer on a regular basis. If you were to buy a home with only a 43% debt-to-income ratio, you might have to do without any of these habits.

Take the cost of your most expensive hobby or activity out of the payment calculation before you begin making mortgage payments. If the balance of your savings doesn’t allow you to buy the home of your dreams, you may have to start cutting back-or think of a less expensive house as your dream home.

Selling One Home, Buying Another

Save the proceeds from your current home in a savings account and determine whether you can afford the mortgage after adding other necessary expenses, such as car payments or health insurance. You should also keep in mind that additional funds will be allocated to maintenance and utilities. Larger homes will certainly incur higher costs.

Be sure to use your current income when calculating, and don’t assume you’ll make more money in the future. 

There are no guarantees in life, and careers change. As you’ll end up in a long-lasting relationship with your credit cards if you base the amount of home you buy on your future income, you might as well schedule a romantic dinner with them instead. 

As long as you save enough for your down payment, you can afford to buy a home if you can handle these extras without taking on additional credit card debt.

Do You Plan to Stay?

When looking for a home, affordability should be the top priority, but it’s also important to consider how long you intend to live there. If not, you might end up living in a house you cannot afford in a city or town you want to leave. The rule of thumb is to live in a home for five years before selling it. 

Take into account the costs of buying, selling, and moving. You should also take into account the mortgage fees associated with the home you are selling. You may not be ready to buy a home at this point if you can’t decide what city or town you will live in and what your five-year plan is.

Purchase a home at a price far below what you can afford if you are buying without a five-year plan. When you have to sell it quickly, you’ll need to be able to take a hit. A guaranteed buyout option is used if your company buys the houses of relocated employees.

How Much House Can I Afford?

When figuring out how much house you can afford, you should look at your income, savings (for a down payment and closing costs), and recurring debts. To be approved for a mortgage loan, a debt-to-income (DTI) ratio of 43% is a good guideline.

How Does Buying a House Work?

Buying a house is one of the most significant purchases of your life. In order to make an offer on a home, you should first determine if you can afford it, then ask your lender for a preapproval letter, which means the lender believes you qualify for a mortgage loan. Following acceptance of your offer, you will be required to make a downpayment and have your mortgage loan approved by an underwriter and lender. Learn more about how to buy a house.

What Is the 28/36 Rule?

Underwriters and lenders use the 28/36 rule to determine if you can afford the home you want to buy. The rule is generally considered one of the best ways to determine how much debt you can afford based on your income.

In order to be approved for a mortgage, most lenders require a maximum ratio of household expenses to income of 28 percent, as well as a maximum debt-to-income ratio of 36 percent.

Final Words

The sooner you buy a house, the sooner you will start paying down your mortgage. As with almost any investment, the sooner you get started, the better off you will be later. 

I wish I would have begun buying properties earlier than I did, as I would be in a much better financial position now. If you don’t stretch your finances too thin and plan to hold a house for the long term if you have to, it will be a great investment. 

Timing any market is tough. How do you know where the bottom or top is? You may be able to see it clearly two years later, but that does you no good. 

There are so many economic factors at play, and it is really tough to guess if houses will appreciate or not. Instead of timing markets, figure out if now is a good time to buy for you. If you learn the best ways to buy a house—and buy below market value—you will be in great shape.

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