Buying your first house is one of the biggest decisions you’ll make in life. But how do you know when the time is right? Should I buy a house now, or wait a couple of years? We’ve put together a guide to help you understand if you’re ready to make this step.
1. What’s My Debt to Income Ratio?
Your debt to income (DTI) ratio is one of the main factors a lender will consider before offering you a mortgage. This is used by credit providers for any kind of credit application and represents your regular debts weighed against your income.
Your regular debt includes things like:
- Your rent or mortgage repayments
- Your monthly bills
- Other regular repayments such as a car loan
Most large mortgage providers like banks cap an individual’s DTI ratio at around 43%. Many providers cap it lower than this, or would at least consider you a lower risk if you have a lower ratio. However, you may also find providers who will consider approving you for a mortgage with a higher ratio, depending on your circumstances.
A DTI ratio of 43% means that you spend a maximum of 43% of your monthly income on debt repayments. This means that if you take home $4,000 per month, your monthly repayments would total no more than $1,720. This includes the prospective monthly repayments on your mortgage.
If you’re concerned that your DTI ratio is too high for approval, you may wish to consider waiting until you’ve paid off an auto loan or can reduce your ratio another way. A salary increase will also change the ratio, so setting yourself up for a raise can help skew things in your favor.
2. How Much Do I Have Saved?
When going into this decision, there will be several items that require immediate payment before you get your keys. You’ll likely want to use the bulk of your savings for a down payment on the property. The larger this payment, the lower your monthly rate will be during your mortgage. Larger deposits can also mean that you avoid the need for private mortgage insurance (PMI).
Take a standard 30-year mortgage as an example. Say a property costs $300,000. If you have $30,000 (10%) saved for a down payment, this leaves $270,000 to pay off over 30 years. This translates to $750 per month during that time (before interest). However, if you have $60,000 saved for a deposit, your mortgage payments will be more like $667 per month before interest.
The difference between $30k and $60k is large and would represent several years of saving for many people. However, even adding $10,000 to your deposit reduces the amount of your mortgage you’ll be charged interest on and makes your repayments far more manageable.
3. Am I Ready for the Responsibility of Homeownership?
Owning a home isn’t easy. When the HVAC system breaks, it’s not your landlord’s responsibility anymore: the costs are on you. If you fall behind with payments, it’s no longer a matter of moving out of a rented place and back in with your parents: the house has to be sold, and without good maintenance, this could be at a lower price than you bought it for.
Feeling confident that you can rise to the challenge is important. Make a list of things that could go wrong and consider how you’d address them. It’s not a fun task, but it can help you understand if you’re ready to commit.
4. What’s My Work Situation?
Lenders tend to prefer it if you’ve worked a steady job for a long time. Sticking with the same workplace shows that you represent a lower risk. This isn’t a hard and fast rule, of course — lenders would understand if you had recently moved to a new job offering a higher salary. However, it’s worth showing that you’ve spent a few years in any new role to demonstrate your ability to commit.
5. How Much Should I Keep Aside for Home Improvements and Furnishings?
Besides the money you put aside for a down payment, you should consider what money you’ll need after the house is bought. You’ll likely need to furnish the place fully. You may also need to conduct repairs and maintenance. The full cost can easily reach into the thousands, so additional savings should be paid attention to in order to properly make your new house feel like home.
6. Is the Timing Right Where I Want to Buy?
Waiting for the ideal moment in the property market is a fool’s errand for most of us. Knowing which way house prices will go in the future is almost impossible. However, if your first-choice area seems to be riding a permanent house price inflation bubble, you may wish to consider looking at an area where prices are less disproportionate.
- Help you get more for your money, and
- Avoid the upsetting scenario where you buy at the highest price and are subsequently the victim of an unexpected crash.
7. Are There Other Parties Involved?
For many people, buying a house isn’t a solo venture. Couples often purchase their first property together — but remember that this is a lifetime investment. For well-established partners or married couples, this is less of a concern. However, the other individual’s long-term plans and financial details will come directly into play over time.
Find the Best Loan Provider for Buying Your First House
Once you’ve got your savings in order and are sure you’re ready for this exciting step, you need a top-quality mortgage provider. Finding a great loan provider is a must because the terms they offer will be the terms you work on for years to come. Get in touch with our team at Associates Home Loan to learn more.