How to Know If You're Financially Ready to Buy Your First Home

You've figured out how much money you may need to buy your first home, looked at how your credit score affects buying a house, and learned that you may not need 20% down.

So now comes a much more important question:

Are you actually financially ready to buy a home?

Being able to qualify for a mortgage and being comfortable owning a home aren't necessarily the same thing.

A lender can tell you how much you're approved to borrow. Your own budget tells you how much you actually want to spend.

Start With Your Monthly Budget

Before deciding what price range to shop in, look at what you're already spending each month.

Consider your:

• Income

• Car payments

• Student loans

• Credit cards

• Childcare

• Groceries

• Utilities

• Insurance

• Transportation

• Subscriptions

• Savings

• Entertainment and everyday spending

Then ask yourself what monthly housing payment would allow you to continue living your life without constantly worrying about money.

You don't have to spend the maximum amount a lender approves.

In fact, you may be much happier if you don't.

Do You Have Money Left After Closing?

Getting the keys shouldn't leave your bank account at zero.

Homes have a funny way of needing things immediately after you move in. Sometimes it's something significant. Sometimes it's simply discovering that you suddenly need a lawn mower, curtains, a ladder, a new lock, and 14 other things you never thought about while renting.

Ideally, you'll have some savings remaining after your down payment, closing costs, inspection expenses, and moving costs.

That cushion can make the transition to homeownership much less stressful.

Is Your Income Relatively Stable?

You don't necessarily need to have the same traditional 9-to-5 job for years to become a homeowner.

People with W-2 income, self-employment income, commission income, and other income structures can all potentially qualify for mortgages.

What matters is whether a lender can document qualifying income under the requirements of the particular loan program.

If your income fluctuates, talking with a lender early can be especially helpful. You'll find out what documentation you'll need and whether there are steps you should take before applying.

How Much Debt Are You Carrying?

Having debt doesn't automatically prevent you from buying a home.

Car loans, student loans, credit cards, and other monthly obligations are common.

However, lenders look at how your monthly debt payments compare with your qualifying income. This is known as your debt-to-income ratio, or DTI.

We'll get much deeper into DTI later in this series, but for now, know that paying down certain debts may improve both your mortgage options and your monthly budget.

Are You Prepared for More Than the Mortgage?

Your mortgage isn't the only cost of owning a home.

Your monthly housing expenses may also include:

• Property taxes

• Homeowners insurance

• Mortgage insurance, if applicable

• HOA dues, if applicable

• Utilities

And then there are expenses that don't arrive neatly every month.

Eventually, appliances break. Furnaces need service. Roofs need repairs. Faucets leak.

You don't need an enormous repair fund before you're allowed to become a homeowner. You do need to recognize that these expenses are part of owning one.

You Don't Have to Be Perfectly Ready

This is important.

Financial readiness doesn't mean having perfect credit, no debt, a giant savings account, and 20% down.

For many first-time buyers, that's simply not realistic.

Instead, you're looking for a financial situation that allows you to purchase a home without putting yourself under unreasonable pressure.

And if you're not there yet, that's useful information too.

You can make a plan.

Maybe you need six months to save. Maybe paying off one credit card would make a difference. Maybe you need to improve your credit. Maybe you're already in better shape than you thought.

Find Out Before You Rule Yourself Out

One mistake I don't want first-time buyers to make is deciding on their own that they'll never qualify.

You don't have to wait until you're "perfect" to start asking questions.

You can talk with a lender long before you're ready to buy. You can also talk with a Realtor before you're ready to tour homes.

Sometimes the first step toward buying a house isn't buying anything at all.

It's simply figuring out where you stand and what needs to happen next.

Related Articles

Is Now a Good Time to Buy a Home in Northern Colorado?

How Much Money Do You Really Need to Buy Your First Home in Colorado?

What Credit Score Do You Need to Buy a House in Colorado?

Can You Buy a Home With 3% Down?

Next in the Series

Once you know you're financially prepared, there's another big question:

Does buying actually make more sense than continuing to rent?

Next week, we'll look at Renting vs. Buying in Northern Colorado and why the answer isn't always as simple as comparing your rent to a mortgage payment.