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At some point, many renters look at another rent increase or lease renewal and think, “I am ready to buy a house.”
Maybe.
But sometimes what we really mean is: I am ready to stop renting.
Those are not always the same thing.
Homeownership can build wealth and provide stability, but buying before you are financially prepared can turn an asset into a source of stress. Before you start touring houses, consider four questions.
Can you really afford it?
A good starting point for house hunting is to look at homes priced around two to three times your gross annual household income.
For a household earning $60,000 a year, that suggests an initial range of about $120,000 to $180,000.
Then look at the monthly numbers.
As a rule, whether you rent or own, try to keep housing costs at or below 30% of gross income. For our $60,000 household, gross monthly income is $5,000, making 30% about $1,500 per month.
When considering a mortgage, two additional ratios matter. A traditional front-end ratio limits housing costs to about 28% of gross income, or $1,400 per month for this household. That includes principal and interest, property taxes, homeowners’ insurance, mortgage insurance and homeowners’ association fees.
The back-end ratio looks at housing plus all other monthly debt payments. A common target is 36% of gross income, or $1,800 per month for our example.
That does not mean the family can spend $1,800 on housing. If they already have a $400 car payment and $200 in student loans, those obligations reduce what they can comfortably afford for a mortgage.
The amount a lender will approve and the amount you can comfortably afford are two different numbers.
Are your credit and savings ready?
Credit scores generally range from 300 to 850. Although some loan programs allow lower scores, I like 620 as a practical minimum before seriously considering homeownership. Many private lenders and conforming loan programs use 620 as a baseline for fixed-rate conventional mortgages, while adjustable-rate mortgages may require scores closer to 640. Larger loans often require stronger credit.
Before applying, review your credit reports carefully. If you find inaccurate information, dispute the errors with the credit bureaus and, when appropriate, with the company reporting the information. Pay bills on time, reduce high credit-card balances and avoid opening several new accounts right before applying.
Savings matter too.
The down payment is not the finish line. Buyers also face closing costs, inspections, moving expenses and, eventually, repairs.
A useful goal is to keep three to six months of essential expenses in savings after closing. Using the guideline that essential needs should consume about half of income, our $60,000 household would have about $2,500 in monthly needs. That suggests an emergency fund of roughly $7,500 to $15,000 after buying the home.
Will you stay long enough?
Buying ties up cash that could otherwise be saved, invested or used to reduce debt. It also comes with transaction costs.
Your expected tenure therefore matters.
Two years is important because, in general, homeowners must own and use a home as their primary residence for at least two of the five years before selling to qualify for the full federal capital-gains exclusion.
You might break even after three years if local home values rise rapidly. Five years is the traditional break-even rule of thumb, giving mortgage payments and appreciation time to offset closing costs, commissions and moving expenses.
In slower-appreciation or high-cost markets, however, breaking even could take eight to ten years.
If you already expect to move again soon, renting may be the better financial choice.
Would waiting make you a stronger buyer?
There is nothing wrong with renting while you prepare.
Another year may give you time to improve your credit, pay down debt, build savings or qualify for better financing. It can also give you time to investigate homebuyer education and down-payment assistance programs.
Waiting is not necessarily falling behind.
Sometimes it is the strategy that allows you to buy successfully later.
The goal should not be to become a homeowner as quickly as possible. It should be to become a homeowner you can afford to remain.
So, if you are tired of renting, start preparing. Check your credit. Build your savings. Pay down debt. Run the numbers. Think realistically about how long you expect to stay.
And when the numbers say you are ready — not just your frustration with your landlord- then it may be time to start looking for a house.
Dr. Stephanie Yates is a CFP®, Enrolled Agent, and the Regions Bank Endowed Professor of Finance at the University of Alabama at Birmingham’s Collat School of Business. She serves as Executive Director of the Regions Institute for Financial Education and appears regularly as a financial expert on Fox 6.
