When you’re young, renting can seem like a great option because you can move whenever you want and most of the maintenance responsibilities that come with home ownership are not your problem. However, once you have settled into a career you like, and perhaps other responsibilities in your personal life have entered the picture, you start to see the security that owning your own home can offer.
However, wanting to own a home and feeling ready to own one is not the same thing. Faced with the biggest personal financial decision of their lives, many people struggle with the latter even when they are ready. To help you decide if it is time to buy your own house, here are the most important things you should consider.
- You have saved enough for a house deposit: If you don’t yet have this, you are definitely not ready to buy a house. Do some research to get an idea of the average house prices for the area and house size you are interested in. Ideally, you will save up around 20% of the house price, plus some extra to cover the costs associated with buying it, such as solicitors, conveyancers, and building and pest inspectors.
- You have a good credit score: Banks and other lenders, such as home loan brokers from Loan Nerds, will check your credit score before financing your home purchase. If you have a history of a lot of debt or many late payments, you may be charged a higher interest rate, have to make a large deposit, or you may not find anyone willing to lend to you at all. Many credit score companies now offer a report which will give you your score and let you see areas where you can improve it.
- You have worked out what you can afford to borrow: When you get a personal loan, the lender will consider things like your income, other financial commitments, and any assets or savings you have, to try and judge your ability to repay them. It is a good idea for you to do this first so that you can work out what you would realistically be able to afford to repay each month. You can also use this to check how well covered you are against contingencies such as losing your job or prolonged illness.
- Your debt is manageable: One simple metric that lenders of home loans like to look at as a sort of acid test of your ability to repay is the debt-to-income ratio. Simply, the higher this number is, the more risky you appear to them. There are online calculators that you can use to calculate this figure for yourself and get an idea of your perceived level of risk from the lender’s perspective. However, you cannot know exactly which outcome they consider to be high. Still, there are some things you can do to improve your chances, such as keeping credit card balances below 30% of their limit.
You have no upcoming major life changes: Avoid big changes like quitting your job or taking out other loans while you are in the process of buying your house. The lender will be notified and may refuse to finance you.
