Homeownership is a major step that shouldn't be taken lightly. For some, it's the most expensive purchase they'll ever make, while for others it's becoming increasingly unattainable. Deciding if whether now versus later is a good time to buy can be difficult to pinpoint, but the decision is ultimately yours to make — hopefully after a review of the factors to consider.
The times have changed and there isn't an easy way to identify if now is a good time to buy — or not. For example, in 2019 mortgage rates were low and the prices of homes hadn't yet surged. This would be indicative of a more ideal time to buy. However, now more factors like inventory, surging housing prices, an increase in construction cost, and high mortgage rates are contributing factors that can be considerable parts of the equation — more than ever before.
Should I buy a house now or wait?
There isn't a certain checklist to use or quiz to take to determine if now is a good time to buy a house; however, there are some factors to consider that can help you make your decision.
Your income
Your earnings and job stability (or financial readiness) is among the most important factors for determining whether it’s a good time to buy a house. If you're unemployed or if your income stream isn't steady — if you've changed jobs, or even if you have gaps in your work history — you may still be able to qualify for a mortgage; however, it's common for most mortgage lenders to request documentation showing a two-year employment history. Most lenders want to know you'll be able to repay your loan, so having a reliable and dependable income is an advantage.
Additionally, one major factor that determines how much house you can afford is your debt-to-income ratio—your monthly debt payments divided by your monthly income. In general, lenders like to see a ratio between 36% or below.2
You should also consider property taxes and insurance. Keep your expenses, including your monthly principal and interest payments to 36% or less of your household pre-tax income, which is what mortgage lenders tend to want to see. For example, if your pre-tax household income is $7,500 per month, your total monthly housing expenses should be no more than $2,700.
Your future plans
Buying a house could be a profitable long-term investment over renting, but it’s obviously more expensive upfront. There's closing costs, including attorney fees, a home appraisal, title insurance, and other expenses for transferring the property and setting up your mortgage, which add up to about 2% to 5%3of your mortgage. For example, if you buy a home for $500,000, expect to pay up to another $25,000 in closing costs.
Because of these high costs for buyers, real estate agents often suggest only buying a house if you plan on staying for at least 5 years. If you can’t commit to that, continuing to rent might be a smarter money move.
Your credit score
According to the Federal Reserve Bank of New York, between 750 and 800 are scores that demonstrate you are a lower-risk borrower. To qualify for a mortgage at all, you tend to need a credit score in the 500s, though the minimum could be higher, depending on your lender. If your credit score is too low, you’d need to wait to improve your credit score if you need to secure a home loan.
The higher your credit score, the better your chances of getting a lower mortgage interest rate, which affects your monthly payment amount. If your score is on the lower end of qualifying, you might wonder whether it’s worth improving before buying.
Conversely, with a lower credit score, your mortgage rate and consequently your monthly mortgage payments, may be higher — meaning you could pay more money for the same house than you would if your credit score were higher.
Interest rates and home prices
Before the pandemic, mortgage rates were relatively low but increased in years since, averaging around 8%. While the current 30-year mortgages rates of 6-7% are lower than previous years, they are still relatively high. That means it remains more expensive to borrow for a house than it’s been in decades.
High mortgage rates can make home buying difficult, as high rates correlate with more hefty mortgage payments for buyers. High mortgage rates can also pose a challenge to sellers who may receive lower offers for their home. While it's possible that mortgage rates may fall, it's hard to predict or forecast for the future. It's a good idea to shop around or compare lenders and inquire about a float-down option.
Mortgage rates are high, and the housing inventory is low, yet even with elevated rates, there are still buyers. This could mean there is no real perfect time to purchase a home. Still, according to Fannie Mae’s Home Purchase Sentiment Index® (HPSI), more than 70% homebuyers feel the market isn’t in their favor.1 This could be because home prices are increasing, yet household income and earnings are not. Consider basing your decision on your personal needs and financial situation.
For more information about ways to deal with high mortgage rates read Fidelity Viewpoints, Hope for homebuyers.
Your down payment
The more you put down, the less you have to finance; conventionally, you should plan to put at least 20% down but you may not be required depending on your loan type.
Specifically, conventional mortgages require a minimum down payment of at least 3% of the home price per Fannie Mae, while other types of mortgages have different minimums. However, a lender could charge a buyer private mortgage insurance (PMI) on a conventional mortgage if the buyer’s down payment is less than 20% of the home’s price. PMI tends to cost between 0.46% and 1.5% of your original loan amount per year.4
You have considerable savings
Having money saved for a down payment, closing cost, initial fees and on-going expenses is an advantage and a fiscally responsible decision. Having enough to cover utilities and maintenance costs, which could be higher than what you’re currently renting is also paramount. You should consider accounting for repairs as well. It's a good idea to take note of today's job market and economic uncertainty, and to have an emergency savings of at 3 to 6 months' worth of monthly expenses to cover your mortgage and other maintenance related needs.