With these items checked off your list, you’ll be ready to pounce on that perfect home.
- Trying to buy a home in 2022 was a difficult prospect, but you may have more luck in 2023.
- Consider your down payment and credit score if you want to be a strong buyer.
- Also note that rent payments don’t include the real costs of homeownership.
If you’re a renter, you may be hoping to change that sooner rather than later, and I absolutely sympathize — I’m aiming for homeownership myself in the next few years. If you were intending to buy in 2022, you may have found yourself shut out due to the combination of high prices, rising interest rates (which more than doubled between the beginning of the year and the end), and a low supply of homes that caused bidding wars aplenty.
If you’re hoping for better luck getting a mortgage in 2023, there are a few ways to know for sure that you’re as ready as possible. It stands to reason buying a home involves jumping through a lot of financial hoops; after all, it’s the biggest purchase many of us will make in our lives. If you meet the following conditions, you just might be a strong home buyer.
1. You have a robust down payment saved
For a lot of people, myself included, the sheer amount of cash involved in buying a home is the biggest stumbling block. While you can get a conventional home loan with as little as a 3% down payment (and good credit), I don’t necessarily recommend it, for a number of reasons. Going this route will see you signing on to pay for private mortgage insurance (or PMI) until you reach 20% equity in the home. PMI doesn’t protect you; it protects your lender in the event that you stop making mortgage payments.
You can also get an FHA mortgage loan with 3.5% down, but you’ll pay a mortgage insurance premium (or MIP; confused yet?) for the life of the loan unless you refinance to a conventional mortgage. If you put 10% down on an FHA loan, you’re stuck with that MIP for 11 years. In short, putting down a larger down payment (ideally 20%) will cost you more money and time in saving it up before you buy, but it’ll pay off when your mortgage payments are lower. However, I absolutely understand not wanting to wait to amass that 20% if you live in a very costly area or just plain don’t feel like watching your rent rise year after year as you save up. Just bear in mind that a down payment under 20% may not save you much money in the long run once you figure in those mortgage insurance costs.
2. Your credit is solid
While you need not have an excellent or even a very good credit score to buy a home, it will certainly help you get approval from a mortgage lender, along with a decent interest rate. If your credit isn’t so stellar, you still have a few options, most notably in the form of an FHA mortgage. You can have a credit score as low as 580 and still be eligible to put down 3.5% (if your credit score is between 500 and 580, however, you’ll need to make a 10% down payment). But having a higher credit score gives you more mortgage options, so it pays to work on boosting it before beginning your home search in earnest.
3. Your debt-to-income ratio is under 36%
You’ll be required to provide a lot of financial information when you apply for a mortgage, and your debt-to-income (DTI) ratio is a calculation a lender will be focusing on to establish your ability to afford a home. It pays to do this calculation yourself and see how strong a buyer you are based on it.
More: Check out our picks for the best mortgage lenders
Ideally, you should have a DTI of 36% or less. Add up all your monthly debt obligations and divide that number by your monthly income and you’ll end up with a percentage. For example, let’s say you earn $5,000 per month and make the following debt payments:
- $550 car loan
- $100 minimum payment on your credit card
- $150 personal loan payment
Your DTI is 16% in this scenario, and you can likely afford a reasonable mortgage payment, at least in the eyes of the lender (who doesn’t consider how much money you spend every month on travel or your hobbies).
4. You recognize that owning a home can be expensive
If you want to be a strong home buyer, it’s important to take a long, hard look at every aspect of your finances, and really take a deeper dive than even a lender will in the course of considering your application. Owning a home is more expensive than you may assume because there’s more to pay than just a mortgage. While you may pay a lot in rent, ideally, your landlord is covering the costs of repairs, maintenance, property taxes, and maybe even some of your utilities. In short, a rent payment doesn’t equal a mortgage payment.
Once you buy a home, those costs are all yours. And if something breaks in your home, and it’s not due to a peril covered by homeowners insurance, you’re on the hook for paying to have it fixed. If you’re not ready for these costs (and don’t have an emergency fund saved up), you could find yourself going into debt to pay them. That’s definitely something to consider if you dream of homeownership.
We’re all hoping for better market conditions for home buyers in 2023 and beyond, but even if the market begins to heavily favor buyers, it pays to consider your status as a potential home buyer. If you meet all the conditions above, you can call yourself a strong home buyer candidate — good luck out there.