Choosing the right time to buy a house is not exactly a purely scientific method. Depending on your age, pay, and your situation in life, things will be different from person to person. Here are a couple of key factors that are common among home buyers, and some helpful guidance on how to get to these examples. Don’t try to rush this process, and save, save, save!
You have paid down most of your debt
One of the factors to know it’s the right time to buy a house is your debt to income ratio, which will affect the amount you can borrow for your home based on how much debt you have. This can be taken into account with your mortgage payment or without your mortgage payment. It depends upon the lender. The percentage of debt that you should have varies wildly between lenders, but the most common is to keep it under 30%. Getting approved for a mortgage loan can be hard for many people. Knocking out some debt, whether credit cards, car loans, student loans, or collections will help a lot. Not only is this going to help you get a better rate, but you’ll have the extra cash flow into savings for a downpayment. Which leads me to the next point.
You have a large down payment
The right time to buy a house is when you can afford to. You’ll see that mantra repeated all across the internet. It’s true, the time to buy a house is not when you have little to no down payment. Although FHA loans require only 3.5% down, you’re still going to want to save as much as you can. For starters, the more you put down, the less you’ll have to pay each month in your mortgage. Now, what’s even more interesting is if you save around 20% of the total cost of the home. You won’t have to pay PMI (private mortgage insurance). Private mortgage insurance can cost you thousands of dollars over the life of your mortgage, and it’s to protect the bank should you default on your mortgage. Saving up 20% is a great way to keep more money in your pocket in the long run. In addition, saving more for your down payment is only going to benefit you. Having more in a savings account is going to give you leverage to negotiate or put some of those savings towards updating your home or improving your home’s value.
I would like to point out that saving up 3.5% in some cases is the right thing to do. This is highly dependent on your situation, and can be the right move if it’s going to cut down your expenses significantly. Just make sure you have a lawyer look over the paperwork to make sure you are getting a good deal.
You have a high credit rating
Although some people can afford to pay cash for their homes, most cannot. a high credit rating only comes with the right utilization of your credit card, payment history, and established credit history. Remember how we talked about paying off debt? That’s only part of the equation. You still need to keep those credit cards open because it establishes a longer credit history. Paying off any credit card debt is going to automatically boost your score. However, if you want to boost it even higher you’ll want to do a couple of things:
- Only use 30% of your available credit and pay off the balance and each month.
- If you are purchasing a home in a year or two, apply for another line of credit. It will lower your established history of credit (it takes the average number of years).
- Request higher and higher balances every 6 months, but only after paying off the balance every time
You will want to aim for a 740 or higher on your credit score as that is an indicator it’s the right time to buy a house. Most people use services like Credit Karma to check their balance often. Fair warning though, if you have problems with credit cards it’s best to not get more. Instead, pay off the debt you have and save a large down payment. Paying the debt off will still help boost your credit, and try boosting your credit in other ways. There are also secured credit cards that can help you build credit while not spending money you don’t have.
You have a stable job
Your mortgage lender is probably going to want at least 2 years worth tax returns to establish your income. Changing jobs is not a good sign that it’s the right time to buy a house. In fact, it signals to lenders that your income is not fixed and that you are not a good investment. Give yourself at least a year at your new job before you try to buy a new house. This will give you at least one year’s tax return for the bank to look at, and to show that your income is stable enough and high enough to lend to.
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