The reasons for wanting to buy a first home are so personal! You may be facing a life-changing event like marriage or a new baby; you have a new job with a big salary increase and feel ready to start thinking about buying; or perhaps you’re at an age when all your friends have houses and you want to keep up. If you can remove yourself from the emotional aspect, though, whether or not you should buy is definitely better approached as a financial decision.
There are two main financial components to look at when you’re considering buying: the current housing market and your own money situation. Reviewing these will help you decide whether you should wait to buy a house or if now is a good time.
What Is the Current Housing Market Like?
Demand for homes has been very high in 2021, continuing 2020’s pandemic homebuying frenzy. According to a recent Zillow survey, more than one person in 10 changed homes in the past year. However, the pandemic also made many people stay put, resulting in fewer existing homes on the market than usual. Additionally, fewer new homes are being built or are taking longer to build (high prices for materials and a shortage of supplies and skilled labor are the reported causes).
Because there is more demand for houses than supply, prices have gone way up – more than 15% in the last year. Sales prices are somewhat balanced out by the current very low interest rates, which translate to more affordable monthly payments, low long-term interest costs, and a bigger home budget.
There are many eager buyers out there looking to snap up a home.
How the current real estate market affects first-time home buyers
Having more buyers in the market than sellers usually means each seller gets multiple offers when the property and location are desirable. That usually results in bidding wars, which drives the final home sales price up. According to Redfin, 54% of homes sold above their asking price in May 2021, more than double the previous year.
It’s very difficult for most first-time buyers to win a bidding war. If you’re a typical first-time homebuyer, you’re young, have a low down-payment with high financing and a pretty strict dollar range for your purchase. A seller may be worried that your financing – and the sale – will fall through.
Most sellers want buyers who can make all-cash or high cash offers that carry guaranteed financing or none at all. Those types of buyers – often people who have sold a previous home – are typically able to increase the purchase price they’re offering, too.
Additionally, mortgage lenders imposed tougher qualifying standards for home buyers during the 2020 COVID pandemic shutdown. Because of increased financial risks, lenders now want to see higher credit scores and bigger down payments (and cash reserves) from borrowers. While these standards may be loosening soon with positive U.S. job reports, they could hurt some first-time homebuyers.
What experts predict for buying a home in 2022
The summer of 2021 has seen the hot housing market cool down a bit. Realtors in the Washington, DC metropolitan area, for example, say that there are still bidding wars for many homes but with fewer offers per house than before. House prices are still rising, but at a slower rate than last year. While interest rates are still very low, expect mortgage interest rates to rise to 3.25%-3.5% by the end of the year, according to a number of economists.
Experts predict that the continued rise of interest rates will flatten the current housing boom in late 2022-early 2023 – fewer buyers, so potentially less competition for first-time buyers. However, when home prices remain high and mortgages carry higher interest rates, then it will be more expensive to wait to buy a house than to buy now.
(H1) What Should My Personal Finances Look Like for Me to Buy a House Now?
Here are the money markers that show you could be financially ready to buy a home.
A stable employment history. You have at least two to five years at the same job.
A good grip on your debt. You have a debt-to-income ratio (DTI) of 45% or less (that’s what most lenders are looking for). To calculate your DTI, add up your recurring monthly bills – rent, credit cards, car payments, student loans, etc. Then divide that total by your gross monthly income and multiply by 100 for a percentage.
• (Total monthly payments/Monthly income) x 100 = DTI
• For example, if you earn $75,000 a year before taxes ($6,250 per month), then lenders would like to see your monthly debt lower than $2,812.50.
Savings to cover the cost of buying a house. You’ve saved more than five percent of the cost of a home in your price range. While some loans for first-time homebuyers require a minimal 3%-3.5% down payment, you also need to cover closing costs when you buy/get your loan – this can be in the thousands or 10s of thousands of dollars. Additionally, you should have cash reserves of a couple of months of mortgage payments in case of emergency.
A good credit score. You have a 500 or higher score to qualify for an FHA loan and at least 620 for a conventional loan, though many lenders require higher scores. Borrower-required credit scores vary among lenders and types of loans, so it’s worth putting in the time to better your credit before you buy: excellent credit scores get better loan terms, saving you money over the life of your mortgage.
Income to cover the cost of owning a home. You have income in your monthly budget for utility payments, HOA fees, and repairs in your monthly budget or your savings. Houses require upkeep to maintain your quality of life (and your investment). Most experts estimate you’ll spend 1% of the home purchase price per year on maintenance – 2% if it’s an old house.
Buying a home at the wrong time for your finances is a mistake that can take years to recover from. Read our 21 First Time Home Buyer Tips – everything you need to know before you buy.
Weighing the Difference Between Renting and Buying
Surprisingly, even in major metropolitan areas with sky-high rents, it could cost more to buy than to rent. It may not seem like that, if you’re simply comparing a calculated monthly loan payment to a monthly rental. But if you factor in property taxes and insurance, monthly utilities (rentals often include some of those), and yearly home maintenance, the cost of owning goes way up! Try our Rent vs. Buy calculator to see what might make sense for you.
It’s a different story once you pay down/pay off the mortgage. Over the years, as the balance owed shrinks and house values in your area appreciate, the more equity you will have. Owning a home is almost always a good investment for building wealth, if you put in the time.
Pros and Cons of Buying a House Now
Pros of buying a house now:
- Take advantage of low mortgage interest rates
- Take advantage of the many home loan options available
- Build equity quickly from continuing home-price growth
Cons of buying a house now:
- Current housing market favors sellers
- Low housing inventory, so fewer available houses in most large cities
- Competition from cash buyers/previous homeowners who sold at the height of the market
- Tough mortgage standards for borrowers
When deciding whether or not to buy a home, it’s helpful to speak to a knowledgeable, experienced loan officer who can help you weigh your loan options.