These insights help you navigate the financial stress in your house hunting journey.
Quick takeaways
Buying a home can be exciting—and overwhelming. Especially if you’re tackling it for the first time or the housing market is super competitive, feelings of doubt can be quick to creep in. Have you done all the prep work? Does your choice suit your budget today and your long-term financial goals?
The housing market is also a factor, with cycles of higher housing and borrowing costs that can make it harder to meet and stay on budget. And overspending or stretching your budget too thin may impact other savings goals you have, such as retirement.
The best way to stamp out doubt and stay on strong financial footing is to gain a clear understanding of the money-related essentials and market impact when purchasing a home. Here’s what to consider.
It makes sense that lenders would closely scrutinize your current debt before approving a loan for you to take on more debt. A number to understand? Your debt-to-income (DTI) ratio; it compares your monthly debt payments to your income. In general, lenders look for a DTI within the 36-43% range, with some exceptions. (See some examples in the chart below.) The lower that number, the better. How can you reduce it? Pay down (or off) everything from credit cards to other loans (auto, personal, student).
A careful review of your current and future spending can help you determine what home you can afford. Start with the industry recommendations: Total monthly housing costs should be less than 28% of your pre-tax income.
One idea to pressure test your budget: Live with a future house payment for a few months to test out your potential home budget. For example, if your current rent or mortgage is $1,000 a month and the mortgage and maintenance you think you can afford is $1,500 a month, deposit that extra $500 in a savings account. Are you able to live life as you want and still meet other financial goals?
| Household income | Total monthly debt payments, including mortgage (36%) | Total recommended mortgage payment (28%) |
|---|---|---|
| $75,000 | $2,250 | $1,750 |
| $100,000 | $3,000 | $2,333 |
| $150,000 | $4,500 | $3,500 |
Your credit score directly impacts the interest rate you’ll get. In general: The higher the credit score (aim for over 700), the lower the interest rate. How do you find out your credit score? Each year, you can get a free copy of your credit report. Then, look for errors or outdated information. You can dispute any details that look incorrect.
Next, you can do the work to improve your credit score over time. That includes paying bills when they are due, paying off or paying down credit card balances, and avoiding new debt, especially before applying for a loan. All of those small steps can make a meaningful difference in your interest rate.
Careful planning for both a down payment and an emergency fund can help you in two ways. These critical pieces help lower your mortgage and enable you to deal with unexpected expenses.
The more you have saved for a down payment, the more mortgage options you’ll have. And if you’re able to get to 20% down, you’ll avoid paying monthly private mortgage insurance (PMI). PMI protects the mortgage company if you default on your loan, and typically costs 0.05%–1% of the entire loan amount on an annual basis. You’ll continue to pay PMI until the total equity in your home reaches 20%. One option is always delaying any decision, even by a few months, until you have more time to save.
When it comes to mortgages, all sorts of financial institutions, from mortgage brokers to banks and credit unions, offer mortgages. To get a sense of how much house you can afford, search for “mortgage calculator” online; you can find versions that include both monthly loan and interest payments as well as taxes and insurance. Then, as you start looking and get close to making an offer on a home, you can review and finalize financing, too. Note that different financial institutions require financial documentation, so check the list of must-haves from your lender.
There are two types of expenses to think about when you’re house hunting: one-time expenses and ongoing expenses.
If you’ve been a renter, chances are you don’t have some of the necessary tools that you need, like a lawnmower. If you’re moving from a small home to a big home, you may need more furniture. Those one-time things can add up. There may also be one-time costs associated with a home purchase, such as an inspection.
When it comes to ongoing expenses, some, such as homeowners' insurance, may be obvious. Others, not so much. For example, will your utility costs take a big jump if your next home is significantly larger?
Research the local and state property taxes so you understand the impact those will have on your budget. And think about protection from the unknown, too. For example, disability and life insurance can help your family pay for your mortgage if you become injured or too sick to work, or if were to die.
A financial professional can help you plan ahead and ask the right questions as you take on new chapters in life. If you don’t already have a financial professional,
