Home-Buying Finances: Before You Buy a House, Check These 5 Financial Signals by 30Seconds Mom

The U.S. housing market moves fast, with prices shifting quickly as rates go up or down. If you’re looking to buy a house, the search may feel like a race against time. And once you start browsing listings, it’s easy to jump straight into “What can I afford?”

Before you start touring homes or talking to lenders, it’s worth slowing down and checking your financial footing. Some buyers use tools like the Quicken Loans Affordability Calculator to get a rough estimate. That can be helpful as a starting point, as an estimate can help ground your expectations.

If you want to avoid getting in over your head, these are the five financial signals that matter most.

1. Your Debt-to-Income (DTI) Ratio

The DTI is one of the first things lenders look at. It measures how much of your monthly income is already going into paying debts. If you are spending too much of your income on student loans, car payments or credit card payments, there likely won’t be much left for a mortgage payment.

The conventional 28/36 lender rule recommends that buyers keep:

• Housing costs around 28 percent of your monthly income.
• Total debt under about 36 percent.

If you are already close to these limits, buying a home and adding a mortgage could overstretch your monthly budget.

2. A Stable (Not Just High) Income

A high monthly income definitely matters, but it consistently matters much more when buying a home. Lenders want to see a stable work history for at least the past two years, with predictable earnings, to make sure you can keep up with payments over the long term.

If your income fluctuates a lot or has recently changed, it may be worth waiting for it to stabilize before taking on a long-term commitment like a mortgage.

3. Savings Beyond the Down Payment

Saving up for a big down payment is great, but you must have enough for other expenses that you’ll need to cover eventually, like:

• Closing costs.
• Moving expenses.
• Any unexpected home repairs.

Try to put 20 percent of the home purchase price toward the down payment to avoid private mortgage insurance and reduce monthly payments.

Moreover, you shouldn’t be strapped for cash once you have made a purchase. Homeownership comes with surprises, but as long as you have a financial cushion, it makes those surprises manageable rather than stressful.

4. Your Credit Score

If your credit profile is in good shape, you can secure the best mortgage interest rates and terms. A credit score of 740 or higher can lower your borrowing costs and get you better loan options.

It’s recommended to check your credit score before you seek out lenders or take out a loan. Here’s how you can do this:

• You can get free downloadable reports from AnnualCreditReport.com for all three major credit bureaus (Equifax, Experian, and TransUnion).

• Alternatively, you can use FICO scores (recommended).

As most mortgage lenders use FICO scores, focus more on this platform. Carefully go over the credit report to make sure there are no inaccuracies that could negatively affect your mortgage approval. Also, check the reports monthly to track any changes.

5. Your Budget and Occupancy Plan

A certain monthly payment might not be daunting, but when you add your day-to-day expenses, such as groceries, gas, insurance, health care and everything else that doesn’t show up in a mortgage estimate, that payment can set off a silent alarm.

Housing costs themselves also include more than just the loan:

• Property taxes (these vary by state and municipality, but the average homeowner pays roughly as much as $3,500 annually or about $291 per month).

• Homeowners insurance.

• Repair and maintenance.
  

Some lenders might factor in some of these costs, but not always. The smart thing to do is to make sure your budget works right from the start.

Another key consideration is how long you plan to live in the house. Given the substantial transaction fees (inclusive of closing costs and agent commissions), it is generally advised to reside in the property for at least 10 years, giving you enough time to build sufficient equity and offset the buying and selling costs.

Buying a house that you can call your home is a momentous decision, but don’t rush into it. Do your due diligence first by checking all five signals discussed above to make sure the home loan fits comfortably into your monthly budget.

Use an online loan affordability calculator for an initial estimate and consult lenders to understand what’s sustainable, because your goal shouldn’t just be to buy a house but to keep it without financial stress.

Note: The content on 30Seconds.com is for informational and entertainment purposes only, and should not be considered financial advice. The opinions or views expressed on 30Seconds.com do not necessarily represent those of 30Seconds or any of its employees, corporate partners or affiliates.

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