When to Buy a House: The Best Times to Purchase a Home
When you should buy a house isn’t actually an easy question to answer because there are a lot of factors involved. Of course, saying ‘you should buy a house when you can afford the payments’ would probably be the simplest answer, but it’s not necessarily the right answer— or rather, it’s not the only factor.
It is not a prerequisite to meet all of the conditions discussed below, but hitting a lot of them would probably be a good idea.
Buy a house when you can afford to make the down payment and pay for closing costs.
As you may have seen already on this site, the need to put 20% down a house is an unfortunate misconception. It originated from buyers wanting to avoid Private Mortgage Insurance, which is a small fee to cover the bank’s insurance plan it has for you should you stop making payments. This insurance doesn’t protect you, it protects the banks. So, if you want to avoid paying this fee (which is never that much), you have to be able to put 20% down at closing.
As we’ve covered, 20% is not necessary. In fact, we would argue that it’s actually not a good idea. Wait a few years for your house to appreciate and you’ll probably be able to refinance long before you think and get rid of the unnecessary fee.
Most loans require a minimum down payment, so you’ll need to have a few thousand in the bank to close. If this isn’t possible, there are options through local, state, or national down payment assistance programs, which you can read about here.
The minimum down payment requirements for each type of mortgage are:
203K Loan: 3.5%
Conventional 97: 3%
Conventional Loan: 5%
FHA: 3.5%
HomeReady Loan: 3%
Jumbo Loan: 15-20%
USDA Loan: No down payment required
VA Loan: No down payment required
Closing costs:
Closing costs can range anywhere from 2-5% of the purchase price.
Always get pre-qualified with a lender before you go house hunting. When you have chosen a lender, make sure to discuss closing costs with them before you put an offer on a house. They will be able to provide you with very accurate estimates at each price point.
The national average for closing costs right now is about $3,700.Don’t forget, you can always request the seller pay for closing costs. It’s done all the time. However, if you do ask for them to cover closing costs, don’t expect them to come off too much from their asking price. If you know you’re competing with other buyers, take this into consideration.
When it is a buyer’s market.
A buyer’s market is when there are a lot of houses on the market but people aren’t buying fast enough to keep the market from becoming supersaturated. As a consequence, houses sit and prices are dropped $10K-$50K at a time. If you’re patient, you can get a great house at a great price.
Don’t worry about knowing how to read the market. Housing market articles are literally published every day for investors online. Read a few, get the general gist, and start making plans.
When your credit score is ready.
You need a minimum credit score to get approved for an affordable mortgage. Many Americans choose to use an FHA insured mortgage for its lower requirements. However, even though the requirements are low, there are still thresholds you need to meet.
If your credit score was low, but you’ve since improved it, you may want to consider purchasing in the near future. Not because your success is in any way precarious, but because you just don’t know what life is going to throw at you. The sooner you buy, the sooner you can start saving monthly and building equity. Once you have a bit of equity built up, you could then refinance and get a lower rate. Regardless of the rate, you’ll still likely save money by not renting.
Below are the credit scores you need for some of the most popular mortgages on the market right now:
Conventional Loan: 620 credit score
FHA Loan: 580 credit score (some lenders will go as low as 500, but it’s uncommon)
FHA 203K Loan: 620 credit score
USDA Loan: 640 credit score
When you know you want to work and live in the same place for the foreseeable future.
It just doesn’t make sense to rent if you know you’re going to be in the same area for the foreseeable future. The sooner you buy, the sooner you’ll start saving money and building equity. House’s appreciate (meaning their price tag improves) more and more over time.
So, save money on monthly housing costs, build equity, and when you sell you’ll get everything you put into the house back (unlike you would if you were to rent). Plus you’ll receive whatever amount your house appreciates. Money in the bank.
When you know you’ll get automatic equity.
Some houses, such as foreclosures, are priced well below market value. These houses need a little bit of work, but if you get the right one you could potentially get thousands (upon thousands) of dollars in equity. This means, if you were to sell, that’s money that would go directly into your bank account.
It’s a really smart move, regardless of whether it’s your first house or not. Many people even do it for a living. Choose the right house, and you could too.
When it’s cheaper to buy than rent.
There’s no formula to calculate just how much you’ll save each month when you buy. Your landlord can charge whatever he or she wants.
However, if you are renting a house from a landlord, it’s public knowledge to see how much he or she paid to purchase the building you’re living in. For fun look it up online, and take that knowledge to a mortgage calculator.
If you know they used to live there, then they may have done the bare minimum amount (listed above with each type of mortgage). If you know they didn’t, then you know they at least put 20% down (since it was an investment property). With that knowledge you can run some figures.
When my wife and I did this, we saw that we paid about $800 more a month that what our landlord was paying. Of course it was his right to do this (and more power to him), but it was also our right to walk away. You see, part of our rent went to cover his mortgage, and the rest went straight into his bank account.
We bought our first house five months later.
In short, buy when you’re ready.
It all comes down to you and when you’re ready. Regardless of when you are, know that it’s always better to buy than to rent if you if you plan on staying in the same area for a while.