Buying your first home is a major financial decision, and many factors matter when deciding whether you are ready to buy. Although having enough money for a down payment is a major factor, it is not the only one a first-time home buyer needs to consider. First-time home buyers must also consider their income, debt, savings, financing options, and long-term goals.
Start by reviewing your current financial situation to see whether buying a home is right for you right now. You will then get a realistic view of how much you can afford to spend and whether buying a home will affect your current goals.
Start With the Stability of Your Income
Your stable income is the most important factor in your ability to afford a home. This means looking at your past income and forecasting your future income. This will help you determine whether you can afford the monthly payments for your fixed-rate mortgage, as well as other costs associated with homeownership.
If you earn variable income, are on commission, or work as a freelancer, you will likely need to show a longer earnings history to qualify for a mortgage. In addition to this, you will also need to demonstrate how you will be able to afford your mortgage payments during periods of low income.
Beyond your current situation, consider your plans for the next few years. Are you planning to change jobs, move to a different location, or go back to school? If so, it may be better to hold off on buying a home for now. In general, the best time to buy your first home is when you have a stable income and are living in a location that suits you.
A monthly budget will show whether your current income lets you spend a reasonable amount on a home without putting excessive pressure on other expenses.
Look at Your Savings Beyond the Down Payment
Most first-time home buyers are trying to save for a down payment. However, beyond the down payment, you’ll also need to save for many other home-buying costs. These include closing costs, home inspections, moving costs, and any repairs you discover you need to make after you move in. After you move into your new home, you will also need to buy many household items, such as furniture and appliances.
In addition to saving for the down payment, first-time homebuyers should also save for closing costs, home inspections, moving costs, and initial repairs. After you purchase a home, you will also need to buy furniture, appliances, and other household goods for your new home.
Understand What Financing Could Look Like
Knowing how you might finance a home is another important part of determining whether you are ready to buy. Researching home mortgage loans can help prospective buyers understand how different loan structures, rates, and down payment requirements may affect affordability.
Mortgage options for home buyers to consider when looking for a home. Some home buyers qualify for conventional mortgage programs, while others qualify for alternative mortgage programs based on different criteria, such as down payment amount. Research different mortgage options early in the home-buying process to compare payments and closing costs across programs.
Lenders like SoFi also have a mortgage information page that can provide more insight for those researching the best mortgage options for themselves. They can help home buyers prepare for their home search by determining a fair home price and finding a mortgage that best fits them.
Check the Rest of Your Debt
High monthly debt payments for items like cars, student loans, credit cards, and other debt can have a large impact on your ability to afford a mortgage. By paying off high-interest debt prior to purchasing a home, you can put yourself in a better financial situation and have more money in your pocket each month.
Paying down high-interest debt before buying a home can improve your financial situation, free up more cash each month, and help boost your credit score.
Take this opportunity to review your credit reports for errors and outdated information. Incorrect information on your reports can negatively affect your credit score, potentially affecting your chances of qualifying for a home mortgage and even your interest rate.
Calculate the Real Monthly Cost of Owning
In addition to a mortgage payment, homebuyers must pay property taxes, home insurance, utilities, and maintenance. Some homeowners may also be required to pay Homeowners Association (HOA) fees.
This means that a simple comparison of rent versus expected mortgage payments will not be sufficient to help you decide. Rather, you will need to include all of the costs of homeownership in a realistic estimate of your future total housing cost.
Saving the difference between your future estimated mortgage payments (including property taxes and insurance) and your current rent payments, for several months in a row, will give you an idea of whether or not you can afford a higher expense, and also help you to save up for other goals.
Ask Whether Homeownership Fits Your Life Right Now
Beyond financial readiness, you also need lifestyle readiness to own a home. So, if you are a first-time home buyer, you would likely expect to be in the same area for a reasonable period of time.
In addition to your financial readiness for homeownership, you need to determine your “lifestyle readiness” for homeownership. In other words, what are your work plans? Do you have any family plans? What kind of lifestyle do you want? Buying a home is a big responsibility and not for everyone. Homeownership fits some lifestyles but not others.
Signs You May Be Ready to Start Looking
You have a stable income, are able to manage your current debt, and have saved up enough money for the down payment and closing costs of a home, as well as to cover any unexpected expenses that may arise.
In addition to your expected housing costs fitting within your budget, the amount of your expected housing costs should allow for retirement savings of a sufficient amount so as not to be cut down to save for a down payment, for use of credit cards to pay for the down payment and closing costs, and for other financial goals that you have.
After reviewing your financial situation, you will also want to review your financing options and estimate what price home you can afford. In addition to being financially ready for your first home, you also need to be lifestyle ready. You need to be sure that buying a home is right for you. This means you need a stable job and a stable lifestyle, and you should expect to stay in the same area for a few years. In other words, you need to be comfortable taking on home maintenance and repairs.
Conclusion
It is very difficult to give an exact number of how much one would need to save for a down payment for their first home. In general, though, potential homebuyers should have a stable financial situation, know what homeownership will cost, and decide whether and when a home is right for them.
By taking a close look at where you are today and your income, you can create a realistic budget and begin searching for a home to purchase. Knowing your current financial situation will help you make smart, informed decisions as you search for your first home.