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Buying a house is one of the best things I ever did, both personally and financially. I love having a place to call my own and decorate the way I want. And I’ve been pretty lucky and my homes have gone up in value after I’ve bought them in the past.
I’m not the only one who has benefitted from homeownership. Property owners tend to have higher net worths than renters, although some of that is because people who are wealthier in the first place tend to be in a better position to buy a house.
None of this means buying a house is always a good idea, though. The reality is that if you aren’t financially ready, the dream of homeownership can turn into a nightmare because a mortgage can become unaffordable. This can lead to an inability to accomplish other important financial goals or worse, like losing your home to foreclosure.
If you’re thinking of buying in 2024, be sure to check for these signs you’re ready so you can make sure homeownership is actually the right choice for you.
1. Your credit is in good shape
It is possible to buy a house with a low credit score, especially if you get a government-backed loan. For example, you can get an FHA loan with a score as low as 500. But just because you can get a loan even with imperfect credit doesn’t mean doing so is the right choice.
The table below shows what rates you could expect to pay — and what monthly payments your loan would come with — if you were buying a $400,000 home using a 30-year mortgage at the national average mortgage rate as of mid-January 2024.
| If your FICO® Score is… | This is the average APR you’d pay | This is what your monthly payment would look like |
|---|---|---|
| 760-850 | 6.465% | $2,519 |
| 700-759 | 6.687% | $2,578 |
| 680-699 | 6.864% | $2,625 |
| 660-679 | 7.078% | $2,682 |
| 640-659 | 7.508% | $2,799 |
| 620-639 | 8.054% | $2,950 |
As you can see, buying a home with imperfect credit costs a whole lot more. So, before you move forward, you’ll want to try to aim for a reasonably good credit score. You can do that by taking steps like paying down loan balances or asking creditors who you’ve generally been a good customer with to voluntarily remove old negative information from your record.
If you have a pretty good credit score, though (ideally at least 700), then this is a good sign you’re ready to buy.
2. You have a down payment of at least 10%
Some mortgage lenders don’t require money down or let you put down a small sum, like 3% of what your home is worth. Taking advantage of these options usually isn’t wise, however.
Mortgages with lower down payments cost more because you’re a riskier borrower, so you will generally pay a higher rate. Plus, you’re borrowing (and paying interest) on a larger sum. And an even bigger problem is that you may not be able to afford to sell or refinance if you need to and you made a low down payment.
See, there are huge costs of selling a house, with real estate commissions alone usually running you around 6%. If you don’t make a solid down payment, you risk ending up owing more than you could get for your home. You could be trapped unless you can bring money to the table or can get your lender to agree to a credit-damaging short sale.
To reduce the chances of ending up underwater on the home loan, try to put down at least 10%. If you can put down 20%, that’s even better since you can avoid private mortgage insurance (PMI) that lenders require to protect them in small down payment loans.
If you have a 10% down payment, though, that’s a green light suggesting you may be ready to buy. Of course, this means if you’re buying a $400,000 house, you’d need about $40,000. You can work on saving more if you don’t have enough by reworking your budget to prioritize your down payment or taking on some extra work. If you do have at least 10% down, that’s a good sign you should move forward.
3. You can afford mortgage payments on homes in your area
You’ll also need to make sure that mortgage payments are affordable for you when buying a home you like in your area. Ideally, you’ll want to keep housing costs below around 25% to 30% of income, including your mortgage payment, property taxes, insurance, homeowners association fees, and other monthly costs.
Unfortunately, recent studies show you’d need to make around $114,627 each year to buy a median priced home in most areas of the country. That could make becoming a property owner very difficult. The good news is, if you can put more down or find a home priced below the median, you may be able to move forward even with less income.
To see if you’ve got the green light, check home prices in your area and use a mortgage calculator to see what you’d pay for those you might be interested in. If you’re coming in under 30% of your income, that’s a sign you can move forward.
4. You aren’t planning to move for many years
Finally, you’ll want to be sure you’re planning to stay in the house for at least two years and ideally more like five. Otherwise, you could find yourself unable to pay all the transaction costs of a sale out of your property purchase and still break even. You’ll need property values to go up enough to cover the costs of buying and selling so you don’t lose money — and it takes time for that to happen.
If you spot these four signs you’re ready to buy, then you may want to call a real estate agent and get the process started soon so you can find the perfect home to call your own in 2024.
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