Prospective homebuyers beginning their shopping process may feel pressured by the widespread belief that it’s the best time to buy. Although mortgage rates are at significant lows, there are more factors to consider before buying.
Individual financial circumstances aside, it is a great time to buy because purchase prices aren’t through the roof and mortgage interest rates are still low. Plus, the majority of investors who were out-bidding homebuyers in many competitive markets are subsiding. The record-low interest rates have passed and home values are recovering, which balances the market for buyers and investors.
However, individual financial circumstances are the primary factors to determine whether now is a good time to buy a home. Buyers should postpone buying until their finances are in order to make the costly, long-term commitment of a mortgage. Here are a few financial indicators for buyers to determine the right time to buy.
First, buyers should begin by shopping for reliable mortgage lenders offering the lowest interest rates. Lenders offer the best rates to borrowers with the least risk. Therefore, prospective buyers need to ensure their finances are in the best possible condition.
One of the main qualifications lenders look for is debt-to-income ratio (DTI). Buyers should add up all of their monthly expenses – including projected housing expenses (mortgage payment, real estate taxes and homeowners insurance), car loans, student loans, minimum credit card payments and all other bills. A borrower’s DTI should not surpass 43 percent of their monthly income. Prospective buyers with DTI above 43 percent should work to pay off more debt before shopping for a home.
Another aspect lenders use to qualify borrowers is credit history. Credit scores range from low scores of less than 500 to excellent scores of 720 and greater. Borrowers with low credit scores are offered higher interest rates, where scores of 740 or more receive the lowest rates. Lower interest rates mean less expensive loans. In fact, on a 30-year fixed-rate mortgage, just 1 percent increase on an interest rate makes the home approximately 12 percent more expensive for the borrower. So, it’s crucial for borrowers to increase their credit scores before shopping for home loans. However, it is possible for borrowers to buy down their interest rates, at expensive prices.
Once buyers have healthy financial portfolios, they need to prepare for the expensive costs of purchasing homes. Buyers are responsible for their down payments and closing costs. Traditional down payments are 20 percent of the purchase price of the home. However, many loan programs allow for borrowers to pay as little as 3 to 5 percent of the price of the home as a down payment. Buyers who pay less than 20 percent must pay private mortgage insurance to reduce their lenders’ risk.
In addition to the down payment, buyers pay closing costs ranging from 2 to 5 percent of the purchase price of the home. Buyers must be prepared to pay all of these costs on closing day.
Beyond the cost of the initial home purchase, homeownership requires monthly payments of the loan principal and interest, property taxes and insurance. Potential buyers should calculate the monthly cost of their mortgages to ensure they do not exceed 28 percent of their monthly income. Once in the home, buyers likely want some saving to purchase furnishings, possibly repaint, plant a few flowers and otherwise make the house a home. Buyers should also be prepared to pay for any emergent home repairs such as a new roof, burst pipe or dry rot. Home maintenance typically costs the owners 1 to 4 percent of the value of the home each year.
Duration of Ownership
Another factor to evaluate the proper time to buy is the length of time the buyer plans to live in the home. If potential buyers are settled in their careers with no plans to relocate, then committing to a 30-year mortgage makes financial sense. Otherwise, it may be more cost-effective to rent. Home shoppers in New York should plan to own for at least 2.7 years before moving to make the purchase financially practical, according to the breakeven horizon.
If prospective buyers are financially prepared for the costs of purchasing a home, then now is the best time to begin the process.
Guest Post: By Tali Wee