Home ownership has long been part of the American Dream but over the decades that dream has been changing. Owning a home can be wonderful but it also comes with a hefty mortgage. It’s important to take time to determine if you are ready for a mortgage or not.
Many people build wealth without home ownership and recognize buying a house can be an anchor.
Because of this more people are questioning home ownership through a mortgage. Is there a best time in life to get a mortgage? Is home ownership even worth it? When should you make the leap into buying a home?
Home ownership can still be amazing for many reasons, but let’s look at how to determine if you are ready to buy a home and take out a mortgage.
Are You Ready For A Home Mortgage?
Here are a few questions to ask yourself before pursuing home ownership:
Is your credit ready?
Unfortunately, buying a home is not available to everyone. You need decent credit to qualify for a mortgage.
You don’t need an excellent credit score but you need at least a 600 credit score in most cases. A higher credit score will get you a better rate on your mortgage.
If your credit is bad or you have negative accounts on your credit report, then you need to work on improving those before you will be ready to take out a mortgage.
Check out these posts for help working on your credit:
- What Makes Up Your Credit Score
- How To Raise Your Credit Score With Credit Card Use
- Why Having A Good Credit Score Matters
- How To Improve Your Credit Score
Are your finances stable?
In order to get a mortgage for a home you will need financial stability in your life.
This means steady employment and work history or at least two years of steady self-employment. You’ll not only need to have stable finances but also the ability to prove it.
When you go to get your mortgage you will have to provide a ton of information proving you can financially cover the mortgage payment.
Do you want to be in one place for multiple years?
Home ownership is generally less expensive than renting over the long term. But if you only plan to be in a city for a couple years you could potentially lose a lot of money trying to buy and sell a home in that time.
If you are moving often for your career or plan to try out new locations you likely should wait to buy a home. Taking out a mortgage is not a good idea if you will be selling within a short time frame.
Can you handle the maintenance of a home?
A huge benefit to renting is the ability to call someone when things break. If you own the home then you are responsible for getting things fixed.
When considering a home purchase you need to also consider your ability to handle the home maintenance. Are you handy enough to fix things? Or will you be able to pay for someone to do so?
You should make sure you are ready and able to care for all aspects of the home in addition to the mortgage.
Determining If You Are Ready
If you’ve moved through those questions and still want to buy a home then you are ready.
I highly recommend you also spend some time learning about the home buying process. Too many buyers go straight to looking at homes and falling into dream land instead of going in with a realistic plan.
Now let’s look at some tips for determining when to obtain a home loan.
Determining the Right Time For a Home Mortgage
Buying a home is a dream that everyone shares, but it is not always a financial reality when you are not fully prepared.
If you are thinking about applying for a home loan to make home ownership a possibility you should be careful to consider how the move will impact the household budget.
There are several financial questions to ask yourself:
- Can I afford a down payment to get a reasonable mortgage?
- How will this affect our household budget each month?
- How much of our income monthly will need to service the mortgage payment?
- Will we need to give up anything to make it work financially?
- Can I get a good rate on a mortgage?
- Will I need to pay PMI? Can I get rid of PMI on the loan I will get?
These questions are important for determining your home buying timeline.
Buying a home sooner may allow you to get a lower price before home prices rise. But putting off a purchase can help buyers to save up enough to avoid PMI or pay less in interest over the life of the loan.
Determining How Much House You Can Afford
Before you look at homes you might want to purchase you need to determine how much house you can afford. It’s hard to know if you are ready for a mortgage without running these calculations.
How do you decide how much house you can afford? You run the numbers!
Here are some useful calculators for home affordability:
- NerdWallet Home Affordability Calculator
- Chase Home Affordability Calculator
- Zillow Home Affordability Calculator
You can use these calculators to help you decide how much house you can afford and how much of a mortgage you can take on with your income and downpayment savings.
Looking At Mortgage Options
Once you’ve run some preliminary mortgages you will want to talk with a mortgage lender and get pre-qualified.
This is a great time to interview multiple lenders to determine who you want to work with for the home buying process.
Here are some questions to ask a potential lender about your mortgage:
- Will will the fees on this loan be?
- What are the closing costs?
- What will my monthly payments be?
- Which type of mortgage terms do you offer?
- What credit qualifications do you require and how will this affect the cost?
- Do you offer mortgage points and what will those cost?
- What is the interest rate and APR currently offered?
- What are the income requirements to get a mortgage?
- How much do I need in a downpayment?
- Do you offer Preapproval or Prequalification?
- Is there a prepayment penalty if I want to payoff the mortgage faster?
These questions are a few of the ones that will help you figure out the financial situation and how you can afford a mortgage – or if you need to wait.
Budgeting For A Mortgage
Budgeting for a mortgage payment may not be difficult for families that are already paying hefty rental prices.
In some areas you can pay less money each month when you have a mortgage than you would for a rental. It all depends on your market.
The issue that prevents most home ownership is saving a substantial amount to put down on a home purchase. A high down payment can reduce interest rates and means homeowners pay less in interest overall.
When you are thinking about budgeting for a mortgage you should think about two different periods:
- Saving up the mney for your downpaymnet before buying a home
- Budgeting each month to pay the mortgage payment
Making sure you buy a house you can afford will make both of these easier. You should run number based on your income and ability to save. Do not let a realtor or friends and family talk you into a more expensive home that is beyond your budget.
If you’re not sure what your mortgage payment will look like, check out this video where I break down our mortgage payment.
Taking Advantage of Low Mortgage Rates
Mortgage rates have been low for a while. Since they are expected to remain low for a while it might be the right time for buyers to make a move.
Getting the best interest rates helps make a home more affordable which is why you might need to take advantage of low mortgage rates even if house prices are higher.
Finding The Best Rate
To find the best rate possible for your mortgage you need to shop around. Mortgage brokers are able to find and compare rates for buyers to ensure that the lowest rate possible. Using a mortgage broker is an easy way to compare home loan rates for the best results.
Home loan rates are constantly fluctuating, and a rate that is temporarily low can skyrocket in a short period of time.
Getting Prepared For Your Loan
Buyers should be prepared to take advantage of a low rate as soon as it is available. In order to make sure that happens you should be prepared.
You’ll want to get everything ready for the application including:
- Gathering financial paperwork required by lenders including proof of income, bank statements, and tax documents
- Finding a mortgage broker to check on rates
- Interviewing some lenders on your own to double check rates and service
Buyers can get too excited about making a home purchase without regard to current interest rates. This unfortunately means they do not get the best deals. It is important to be prepared and ready to go but not jump on the wrong deal.
Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.
Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.