Is This a Good Time to Buy a House?
After a long stretch of extremely low mortgage rates, those rates are starting to edge up. However, if you’re in the market for a house, rates are still very low. So, the decision of whether to buy a house has more to do with your financial preparedness than interest rates.
Here are some key questions to consider.
Do you have enough for a down payment?
Christian Community Credit Union has some mortgage options available to qualified borrowers where as little as 3% to 5% of the purchase price is required for a down payment. Just keep in mind that if you put less than 20% down, you’ll probably be required to pay for private mortgage insurance.
After you make a down payment, how much money will you have in your emergency fund? God’s Word encourages us to maintain a reserve, telling us in Proverbs 21:20, “In the house of the wise are stores of choice food and oil, but a foolish man devours all he has.” With a house, lots of things — lots of expensive things — can break. Make sure you have at least three months’ worth of essential living expenses in your emergency fund after accounting for your down payment money, preferably even more.
Will you have enough for the monthly payment?
Lenders have certain formulas for determining how much of your monthly income you can afford to devote to your mortgage payment. It’s a good idea to come up with your own estimate as well. Generally speaking, you’ll be able to live generously and with financial margin if you keep the combination of your mortgage payment, property taxes, and homeowner’s insurance to no more than 25% of monthly gross income.
Will you have enough for ongoing expenses?
If you’re not using a budget (or, as I prefer, a cash flow plan) to manage your day-to-day income and expenses, now’s the time to start. As the Bible reminds us in Proverbs 21:5, “The plans of the diligent lead to profit as surely as haste leads to poverty.” As managers of God’s resources, it’s always a good idea to manage the money God entrusts to us with a plan, but the wisdom of doing so becomes especially clear as we take on bigger and bigger financial commitments, such as buying a house.
So, before you start looking at houses, make sure you have a workable plan that can accommodate your anticipated future mortgage payment, homeowner’s insurance, property taxes, and home maintenance and repairs. There are various rules of thumb for setting that monthly maintenance and repairs budget. Some suggest taking 2% of the purchase price, dividing by 12, and using that as the monthly amount. I recommend allocating at least $200 per month, but it depends on the age and condition of the house.
Some months, there won’t be much to spend in this category—maybe some light bulbs and lawn fertilizer. But there will come a time when you’ll have to replace a roof or furnace. When you have a light bulb month, make sure to set aside the rest of that month’s allocation for future maintenance and repairs.
Is your credit score strong enough?
Your credit score will impact whether you qualify for a mortgage, and if so, what interest rate you’ll pay. Scores range from 300-850. When applying for a mortgage, a score in the mid-700s or higher is ideal.
While your credit report is available to you for free (you can get a copy from each of the three credit bureaus at www.annualcreditreport.com), your credit score may not be as easy to come by. If you’re already working with a mortgage lender, they may offer to pull your score at no cost to you. Some credit cards also make credit scores available for free. If neither of those options are available to you, go ahead and purchase your scores at www.myfico.com. A package of all three (you have one from each credit bureau) will cost about $60.
The three scores should be similar. If one is more than 50 points different than another, take a closer look at the credit report from that company. Something might not be accurate.
The best thing you can do to improve your score is to make sure you’re paying your bills on time. The second best step is to not use too much of your available credit (known as “credit utilization”). Using less than 30% is good; using less than 10% is even better. And that’s true even if you pay your balance in full each month. To determine your credit utilization, the credit bureaus simply take a look at some point each month to see how much of your available credit you are using.
Buying a house can be an exciting experience, but it can also be stressful. Following the advice described above should help keep any financial stress to a minimum.
Matt Bell is the author of Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.