When is the Right Time to Buy a House?

For many, owning a home is a big part of the American Dream. It means not having to ask a landlord for permission to paint cabinets; not having to pay extra to have a pet; and having a backyard to entertain friends. It also means an end to rental payments that don’t build equity. 

But while the privacy and stability of a permanent residence is appealing, deciding to buy a house can also be scary. 

There’s been so much talk in the news about higher home prices and low inventory, some might wonder if timing the housing market for a more favorable scenario is best. The right decision is different for everyone, so it’s important to consider the pros and cons of homeownership before signing on the dotted line.

Renting comes with fewer responsibilities than owning, such as not having to mow grass or fix the furnace. But renting can also be stressful. Landlords have a right to raise the rent as soon as a lease is up, making it hard for tenants to save for financial goals. Those who can’t afford the higher rates may have to find a more affordable place to live, which can be quite a scramble in this low-inventory rental market. 

And there comes a time when those who dream of owning a home in the future start to realize that money spent on rent could be going towards a mortgage payment. That’s when many Americans start to wonder if it’s the right time to buy a house.

Even if the desire to own a home is there, without the required funds, it’s not possible to get approved for a loan, make a monthly mortgage payment, and keep up with all of the other expenses that come with homeownership. In order to purchase a home, you will need:

Lenders look at employment history to evaluate whether borrowers are likely to make their house payments. Those who have worked at the same job for several years appear responsible enough to pay a mortgage bill, while those with large gaps in employment could make lenders leery of risking an investment. Lenders also examine applicants’ income to determine how much of a payment they can afford. In general, they approve a mortgage payment of less than 28% of gross income.

Mortgage companies like to lend money to those who not only can afford their bills, but who pay their bills on time. Proof of this can be found in an applicant’s credit score. Defaulted loans or frequently missed credit card payments cause a decline in credit score, while up-to-date payments and loans reflect a higher credit score. Typically, lenders approve applicants with a credit score of at least 620.

Banks also want to know whether a borrower can afford to take on more debt than they already have. Many applicants have car loans, student loans, and other bills they’re required to pay each month. Lenders want to know that adding a home loan won’t lead the borrower to a debt-to-income ratio of more than 50%.

If possible, it’s best to have 20% down to get a loan. Some first-time buyers can put just 3% down on a conventional loan, and 3.5% down on a loan backed by the Federal Housing Authority (FHA). However, loans with low down payments usually come with the price of Private Mortgage Insurance (PMI), an extra monthly premium added to a mortgage payment. Most borrowers must pay PMI until they’ve reached 20% equity in the home. This is why saving for a down payment is a good thing when considering the right time to buy a house. 

Monthly mortgage payments are not the only costs associated with homeownership. Extra funds must be available for additional expenses including: 

• Closing costs, which can add up to 6% of the total loan value. These include lender fees, title insurance, and attorney fees.
• Homeowners insurance, averaging around $100 per month. 
• Property taxes, which vary depending on the location of the home. In Missouri, homeowners pay around 0.9% of a property's assessed fair market value in property taxes, while Illinois collects around 1.73%. Tax rates vary according to the county. 
• Maintenance and repairs. This is a big difference between renting and owning a home. When living in an apartment or rental house, a landlord is responsible for fixing the air conditioner, buying a new dishwasher, or repairing a leaky roof. But when you buy a house, that money comes out of your pocket. 

These are all things that can help someone who is thinking of buying a house for the first time. Those who have previously purchased a home might have proceeds from a sale to put down on their next property and are probably aware of the costs of maintaining a home. But it’s still important to keep credit in good shape and stick to a realistic budget when planning for the next purchase. 

With steady income and enough funds in the bank, buyers can begin to consider how much space they need, where they would like to live, and how much house they can afford. A Realtor can show some available options on the MLS (Multiple Listing Service) that meet that desired criteria. For the past several years, we have been in a seller’s market, meaning houses for sale are in short supply which drives up competition and prices. This gives potential buyers fewer options and less house than what they could have bought prior to 2020. It also makes selling scary for current homeowners, since they might offload their house easily, and even for a profit - - but have to deal with higher prices and low inventory for their next purchase. 

Still, waiting to start looking for the right house may not be the best answer. In fact, according to a February report from the National Association of Realtors (NAR), existing home sales are gradually declining. With houses sitting on the market for slightly longer than they were a year ago, buyers are taking back some negotiating power and not feeling as inclined to make an offer as soon as an affordable home becomes available. 

And while some might shy away from making a purchase after seeing today’s mortgage rates above 6%, there’s no guarantee those rates will drop if they wait another year to buy a house. A quick Google search on “mortgage rates” produces some articles that say percentages are rising and some that say they’re falling. Timing the housing market to meet the perfect inventory, price, and interest rate all at once is virtually impossible, especially since those criteria are different for everyone.

Purchasing real estate is a big decision. Only you can decide if you are ready for the financial responsibility of owning a home and whether you are at a point in life when buying makes more sense than renting. 

Timing the market isn't always going to work. If you are going through a job transfer or growing your family, you might have to move right away. There is no time to wait for the right price or for interest rates to drop. But if you can't find a home you really love and can wait, it might make sense to do so. When you’re ready, Realtors at Berkshire Hathaway HomeServices Select Properties can show you some homes that fit your needs and budget. 

Cover photo by irina88w by Canva.com