Money

When is the Right Time to Buy a House?

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The last few years have not delivered the best housing market for buyers, with 2021 sales prices skyrocketing 19% in just one year. But just because prices are high, that doesn't mean you shouldn't buy a house.  

Here are three factors you can consider to determine if this is a good time to buy a house in your specific situation.

Financial stability

Wondering where to start when buying a house? First, look at your financials. There are a few areas you'll want to review to make sure you have a solid financial foundation before you add a mortgage.

Emergency savings: Make sure you have at least 3-6 months' worth of expenses saved up. That way, you can keep up with your mortgage and other living costs if you lose your job or get sick. 

Cash for a down payment and closing costs: Most mortgages require you to pay at least 3.5% to 5% of the home sales price upfront in cash. On a $400,000 house, you'll need between $14,000 and $20,000 for a down payment in that range. Budget an additional 3% to 6% to cover your closing costs. 

Credit score: FHA loans require a minimum credit score of 580 (unless you can make a 10% down payment), and other loans may require a higher score. The better your score, the better the interest rate you'll get. Check your score to get an idea of what interest rate you'll qualify for, since that affects your monthly payment amount.

Debt: Mortgage lenders only allow borrowers to have a certain amount of debt, relative to their income. If you have too much non-mortgage debt, your home loan size will be limited. Figure out your current debt-to-income (DTI) ratio by adding up your monthly debt payments (including your estimated new mortgage) and dividing it by your pre-tax monthly income. Most lenders prefer a DTI of no more than 43%.

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Affordability of home ownership

One of the first things to do when buying a house is to determine the actual costs involved. Not only do you have a mortgage to take care of when owning a home, but you'll also automatically have some other extra expenses to budget for as well. Remember to take the following costs into account:

Property taxes: Your county or city government charges property taxes, but your mortgage servicer collects the funds as part of your mortgage payment and pays the bill on your behalf. Anytime your local government assesses homes in your area, your bill could increase if housing values rise. 

Homeowners insurance: Homeowners insurance is required when you get a mortgage. It protects you against certain events that cause damage to your home and personal property (like a fire), but adds to your monthly mortgage payment. 

Maintenance: Home maintenance is a fact of life, no matter how new your home is when you buy it. Expect to spend between 1% and 4% of your home's value on maintenance each year (the older the home, the more you're likely to spend).

Life insurance: You don't need to have life insurance to buy a house, but it's a wise financial decision. There are many ways life insurance protects your home (and your family) if you pass away while you still have a mortgage. And if you're purchasing a more expensive home than your previous mortgage, you may consider increasing your life insurance coverage.

Job outlook

Job security isn't always predictable, but you want to feel confident that your current company is performing well and that your job is stable before buying a house. Lenders typically want to see you in the same industry for at least two years. But if you've just started a new job (even if you're in the same field as before), it may be wise to make it through your first review or two to make sure things are heading in a good direction.

Even though home values have been rising substantially the last few years, that doesn't mean it'll stay that way. Plan to stay in the same place for at least a few years to account for any potential dips in home values.

Another consideration is your company's work-from-home policy. Many people moved out of cities during the pandemic in favor of larger homes with yards. Before you go too far from the office, though, get a feel for your company's long-term remote policy, so you don't regret a long commute if you eventually need to work in person.

Bottom line

Whether you're buying a house for the first time or looking to climb the real estate ladder, timing a home purchase is more about your situation than any external factors. It's hard to predict home value trajectories in such extraordinary times. Focus your analysis on your own comfort levels regarding costs and employment. 

One thing that can take a considerable burden off your mind is having adequate life insurance, especially when taking on an expense as significant as a mortgage. Use your house budget as a starting point for how much life insurance you need, then explore policies from Ethos.

The information and content provided herein is for informational purposes only, and it is not to be considered legal, tax, investment, or financial advice, recommendation, or endorsement. You should consult with an attorney or other professional to determine what may be best for your individual needs.

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