Are You Ready to Buy a House?

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Housing inventory is low, but demand for houses is high. And with mortgage rates at historic lows, many homebuyers are finding themselves in bidding wars and sometimes competing with all-cash offers. 

That means homes are selling for well over asking price in the most competitive markets, according to housing experts we spoke to. They say 2020 has been a strong seller’s market — and 2021 is likely to be too.

If you’ve been thinking about buying a home, you might be wondering if it would be better to hold off a bit until the market is more favorable for buyers.  Experts say there’s no perfect time to buy a house, and the best time is when it makes sense for you personally.

And price is not the only factor at play, either, especially when the U.S. economy is still in recession from the coronavirus pandemic.  

Many people are being enticed by low interest rates, says Adriana Buenrostro, a real estate agent with Prosper Real Estate in Santa Rosa, California. “That’s great — if you have the down payment, the steady income, and the reserves,” she says. “If you don’t have enough money or your job is unstable, that all gets iffy.” 

If you’re debating whether to buy a house or wait, here’s what to keep in mind:

When Should You Buy a House?

Owning a home has long been considered an essential part of the American Dream. But it can also turn into a nightmare, if you buy a house before you’re ready. Here are five signs you’re ready to buy a home.

You Have Stable Income

It’s critical to feel financially secure before you buy a house. If you’ve had a steady stream of income for at least a few years, that’s a good sign you’re ready to take the leap toward homeownership. 

“We are living in the middle of a pandemic, and with COVID-19, you want to make sure you have a stable job. Right now in the current times, that is huge,” says Buenrostro. 

Lenders want to see a consistent history of employment to ensure you have enough money coming in to cover the cost of a mortgage. The majority of lenders ask for your last two years of W-2s, and some will even ask for pay stubs right up until closing. 

If you’re self-employed, be prepared to show your tax returns for the last two years instead. If you received any 1099s during that time, you’ll also need to show those to your lender. 

Fundamentally, while lenders cannot forecast whether you will be employed in the future, they want to see proof that you’ve been steadily employed in the past, and that you have therefore enjoyed a stable income.

You Have a Handle on Your Debt

The next thing to take into account is your debt-to-income ratio (DTI) — a measure of how likely you are to be able to afford monthly mortgage payment, given your current debt and your monthly income.

Your DTI typically includes bills like student loans, car payments, and credit card debt, but not living expenses such as food, gas, and utilities. While maximum DTI levels vary by lender and mortgage type, most lenders are looking for a DTI that’s less than or equal to 43%, according to the Consumer Financial Protection Bureau.

The lower it is, the better. If your DTI is higher than that, prioritize paying down your debt before jumping into the real estate market.

To find your DTI, add up all of your recurring monthly debts and divide that number by your total monthly income after taxes. Then, multiply it by 100 to get your percentage.

You Have Enough Savings 

Your lender will also want to verify that you have enough savings to cover the upfront costs of buying a home, and then some. 

In particular, you should save enough to pay for the down payment and closing costs

Depending on the type of mortgage you get, a down payment can be anywhere from 3.5% to 20% of the home’s purchase price. Closing costs usually make up an additional 2% to 5% of the home’s purchase price.

Lenders also like to see enough in your accounts to cover future mortgage payments and emergency expenses

“I like to see people not only have enough for a down payment, but also have three to six months in reserve because we don’t know what will happen,” says Buenrostro.

She says there have been a few times during the final stages of the process where she’s seen one of the borrowers applying jointly for a mortgage lose their income, and have to see whether they had enough reserves to offset that income loss. 

“Unfortunately, the answer for some of them has been no,” says Buenrostro.

Your Credit Score Is Good

Lenders use their own credit scoring models to determine how risky a borrower you are. Before the pandemic, good credit was considered to be the high 600s or low 700s, says Dan Moralez, a mortgage lender and regional vice president with Northpointe Bank in Michigan. Now it’s moved up into the mid-700s and higher, he says. 

You should check both your credit report and credit score before starting the homebuying process. You can check your credit report from all three main credit agencies for free every year — and until April 2021, every week. Your credit score can be checked by visiting a free credit score website, or in many cases looking it up in your online credit card account. 

The pandemic has made lenders more cautious, so be sure to check your report closely for any inaccuracies that might affect your creditworthiness.  

“Everything is a little stricter because of the times we’re living in. Having good credit always helps. It’ll benefit your rate, your mortgage insurance, and it’ll give you more buying power. Right now, guidelines and loans are changing daily, as well as the interest rates,” says Buenrostro.

You’re Ready to Settle Down

Buying a house isn’t cheap. You’ll have to pay thousands of dollars right off the bat just to live in your new home, including closing costs associated with your mortgage and a down payment.

You should buy when you know that you are committed to staying in one place for an extended period of time. 

“It’s important to consider your long-term goals,” Moralez says. “Often, first-time homebuyers are just getting started in their careers, so are they planning to stay local or will they have a job change that can move them?” 

Keep in mind too that selling your home in the future may also be a hassle, and will be expensive since the seller typically pays commission to a real estate agent.

With all of these costs, it makes more financial sense to stay put for at least a few years after buying. It’s very hard — if not impossible — to make money on a home unless you plan to stay in it for a while, says Moralez.

Consider the Real Estate Market You’re In

Once you find a house you want to make an offer on, Buenrostro and Moralez say you should not delay, even if market conditions favor sellers over buyers.

Those market conditions will largely determine how much wiggle room you have when making an offer. Many houses are selling substantially over asking prices, says Buenrostro.

“Our market here is very competitive. Everything is still going over asking, with multiple offers. There’s a lot of cash in the market right now and buyers are coming in with 20% down on conventional loans,” says Buenrostro, who’s based in California’s Sonoma County. “But I encourage my clients to keep looking because you never know. You want to be ready to jump on that train if a good opportunity comes by.”

Buenrostro says a good real estate agent will pull comparable home sales in your area for you, talk through pricing and market conditions, and work with you to determine a fair offer.

But be prepared for disappointment in a competitive market. Counteroffers are common, and so is rejection. Even if everything is going smoothly, the seller may still be able to entertain and accept other offers. And even after a contract has been signed, issues can occur and the deal could fall apart.

There are things you can and can’t control during the homebuying process. One thing you can control is how high you’re truly willing to go. Set a budget from the beginning and keep to it  when you make your offer.

“I don’t think there’s a magical formula to buying a home. People just need to be informed, be able to knock out these items, get ready and line up their debts,” Buenrostro says. “And if it’s the right time, then the right home will come.”