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Buying a house is one of the most significant financial decisions you'll ever make. But beyond altering your financial picture, buying your first home also represents a substantial lifestyle change for most people. In terms of impact on your day-to-day, homeownership is right up there with finishing school or having a child.
If you're wondering whether you're ready to buy a house, here's a cheat sheet showing what you might factor into the decision. In some cases, all you need to do is run the numbers; others may require some soul searching. Once you've gone through this list, you'll have a better idea of whether you're ready to buy a house.
» MORE: 15 steps to buying a house
You should feel good about buying a house if …
Let's start with five signs you might be ready to buy. Of course, this isn't a checklist or a quiz, so it's not like all five are must-haves. But if these sound like you, you may have already started down the path to homeownership.
You've got a steady income
Whether you're self-employed, work a 9-to-5 or have some combination of the two, you've got money regularly coming in. That's important for obvious reasons, like paying your bills, but also for getting a home loan. Your income is one way mortgage lenders gauge whether you'll repay the loan. Lack of steady employment or an incomplete employment history may make it harder to qualify for a mortgage. Most mortgage lenders will request documentation showing an employment history of at least two years.
You have solid plans for the immediate future
Buying a house is a commitment; if you decide the place isn't working out for you, selling a home is much more involved and expensive than, say, breaking an apartment lease. You want a place where you'll be comfortable now, but also one that could meet your future needs. For example, if you know you want kids, it could make more sense to shop for a three-bedroom now instead of struggling to sell your starter home and upgrade when you've got a toddler (or two) underfoot.
You've built up savings for a down payment
Saving up for a down payment is one of the biggest hurdles on the path to homeownership. While you don't have to put down 20%, depending on the type of home loan you're using, you'll likely make a down payment that's between 3% and 10% of the purchase price. There are closing costs to consider, too — those will run about 2% to 5% of the total price. Having savings already socked away puts you much closer to homeownership.
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You're ready to take ownership
Besides paying the mortgage, owning a house comes with a ton of responsibilities. All the stuff you used to lean on your landlord or super for is now your job (unless you pay someone else to do it, in which case it's yet another expense). So even with a new, move-in-ready home, be realistic about giving up some of your weekends and other free time for home maintenance. One way to skip a bit of the work? Buy a condo instead of a detached house. You'll have less autonomy, but those homeowners association fees should handle the majority of your maintenance.
You can afford a location that meets your needs
Buying a house because you can afford a house, period, is not the same as buying a place where you actually want to live. If urban homeownership is beyond your budget, but you love your everything's-in-walking-distance city lifestyle, keep renting for now. Found a town that fits your lifestyle and your bank account? You might be ready to start looking. While you may need to make tradeoffs — for example, compromising on your commute for a better school district — this isn't just an investment; it's your home. It's best to buy in a place that really works for you.
You should probably postpone buying a house if …
Here are five things that you can think of as yellow lights. Not necessarily a hard stop, but a "proceed with caution." And bear in mind these can change as your perspective and plans evolve or, in other cases, by shoring up your finances.
You're reacting to pressure from friends or family
Yes, it might feel like all your friends have posted photos of themselves standing on a front porch with the caption "so we did a thing." But it's okay just to keep scrolling. If you don't feel ready to buy a house, it doesn't matter if it's a solid investment or a sign of being a grown-up or whatever people are telling you — right now, it's not for you. So whether you're happy with where you are or you want to be better prepared before you buy, there's no rush. Market conditions change, but the housing market is always there.
Your credit score could use some work
Your credit score is one of the most important considerations for mortgage lenders. If your income tells lenders whether you have the money to pay your mortgage, your credit score is a rough proxy for whether you'll make the payments. By giving lenders a way to evaluate risk, that magic number can determine whether you qualify for a loan as well as the terms you'll be offered. The higher your credit score, generally, the lower the interest rate. Improving your credit score before you get into the homebuying game might mean waiting longer to become a homeowner. However, it could help you qualify for a mortgage with more favorable terms and save you money over the long haul.
» MORE: Ways to improve your credit fast
You've got significant debt
Mortgage lenders don't just look at the cash you have coming in. They also look at your debt using a calculation called debt-to-income ratio or DTI. To come up with this number, they divide your total monthly debt obligations (such as student loans, car payments and credit card debt) by your pretax income. Most lenders want borrowers to have a DTI that's 36% or less. If your DTI is 40% or higher, it's wise to work on paying down that debt — without taking on any new obligations — before considering buying a home.
While DTI gives lenders an idea of your cash flow by looking at income and debt, your debt-to-income ratio does not include other expenses like utilities, food or health care. When you're trying to figure out how much you might be able to borrow to buy a house, bear in mind that your DTI doesn't necessarily reflect your actual cost of living. You might qualify for a larger mortgage than you could realistically afford.
You don't want to be tied down
Are you dreaming of extensive travel? Are you considering going back to school or taking some time off from the grind to think about what you really want to do with your life? Awesome. But these aren't necessarily compatible with being a new homeowner. Unless you've got a co-borrower who's willing to support you, making a change that substantially drops your income could jeopardize your ability to pay your mortgage. And an itinerant lifestyle makes it hard to stay on top of a home's upkeep. When maintenance issues pop up or emergency repairs are needed, someone ought to be there to tackle them (or at least see that there's a problem!). A burst pipe is bad enough when you're home; it's a zillion times worse when you discover flooding and water damage after the fact.
Your mortgage payments would stretch your budget
Home prices have been rising steadily, making affordable houses hard to find. And homeownership has lots of costs beyond paying your mortgage. You can use a guideline like the 28/36 rule to avoid becoming house poor: Put no more than 28% of your gross or pretax income toward homeownership costs and cap debt payments (including your mortgage) at 36%. If your mortgage payment would leave little to no wiggle room in your budget and shifting your search to less-expensive houses isn't an option, buying a home might not be the right move for you — at least not right now.
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