Many military members are eager to become homeowners and plunge into real estate. Others question whether buying a home is practical, given that most service members receive orders to move every few years. While buying a home for the first time while on active duty is not without challenges, it can also be a wise financial investment. Ultimately, the success of homeownership hinges on your personal goals and financial plans for your future.
So, how do you know if buying a home is the right decision for you?
Signs That You're Ready to Buy Your First Home
1) Selling a home doesn’t worry you.
You understand what it takes to sell a home, including pricing, staging, and working with real estate agents, so a quick sale upon receipt of military orders doesn't cause stress.
2) You’re open to being a long-distance landlord.
You're comfortable and maybe even welcome the passive income opportunity to run a rental property when you receive PCS orders.
3) You have the financial capacity to invest.
You have a low debt-to-income ratio, you're investing in retirement, and now you're looking for another financial investment to grow your wealth.
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Signs of Financial Readiness for Homebuying
1) Strong Credit Score
Your credit score is a vital indicator of your financial readiness to buy a home. It heavily influences your mortgage eligibility and interest rates.
What is a good credit score?
A score of 700 or higher is good, while scores below 620 can complicate your ability to secure affordable financing. A favorable score should be a top priority when buying a home.
Key factors that make up your credit score:
- Payment history: 35%
- Credit utilization: 30%
- Length of history: 15%
- Types of credit: 10%
- New credit: 10%
Review your credit report. If it’s less than ideal, focus on improving your credit score:
- Dispute errors on your report.
- Reduce your credit utilization and carry less on your card.
- Pay down existing debts.
- Ensure you make all payments on time.
- Avoid opening new credit accounts before applying for a mortgage, as this can negatively impact your score.
Ultimately, a strong credit score enhances your chances of mortgage approval. It also lays the groundwork for a secure financial future.
2) Debt-to-Income Ratio (DTI)
Your debt-to-income (DTI) ratio is a vital indicator of your financial readiness to buy a home. This ratio represents the percentage of your monthly income allocated to paying off debts.
What's a healthy DTI?
Lenders generally prefer a ratio below 36%, with no more than 28% dedicated to housing costs. A lower DTI enhances your chances of mortgage approval and demonstrates your ability to manage monetary obligations responsibly.
To assess your DTI, start by calculating your monthly payments. Add up all your debts, including credit card payments, student loans, and car loans, and divide that total by your gross monthly income. This straightforward calculation provides a clear picture of where you stand.
If your DTI ratio exceeds the recommended thresholds, you may need to reduce your debt before buying a home for the first time.
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How to reduce your Debt-to-income ratio:
- Prioritize high-interest debts first
- Make extra payments
- Avoid new debt
- Increase your income
- Consider debt consolidation
- Negotiate lower payments
- Sell unused assets
- Cancel unnecessary subscriptions
3) Your Financial Cushion
It’s not just about a down payment; prospective buyers should consider several financial factors before diving into homeownership.
Down Payment
While the VA home loan is a fantastic resource for military homebuyers, there are certain situations when it’s unavailable, leaving you to look for alternative loan types. Those headed toward a conventional home loan should save for a down payment.
Though lender's requirements vary based on the market and your credit score, it’s best to plan for 20% down. This will to reduce the amount on the loan and potentially avoid private mortgage insurance (PMI), though many programs allow for lower down payments.
Closing Costs
Some lenders include closing costs in the mortgage, which get repaid over the life of the loan. However, most often, home buyers pay for them out of pocket. You should budget for anywhere from two to six percent of the total amount on the loan. So, let's say the home you’re buying is $300,000. Closing could be anywhere from $6,000 to $18,000.
Emergency Fund
Homeownership is expensive. Save for three to six months of living expenses for repairs and home maintenance to avoid financial strain when something breaks. This safety net is essential for handling repairs and maintenance, ensuring you can address issues without incurring additional debt.
4) The Costs of Homeownership
Owning a home involves expenses beyond a mortgage payment. While potential buyers may focus primarily on the mortgage and the other costs listed above, it's essential to factor in all costs associated with homeownership to ensure you don’t overspend and wind up house broke.
Things to budget for:
- Mortgage
- Property taxes
- Homeowners insurance
- HOA fees
- Utilities
- Gas
- Average grocery bill
Once your budget is set, seeking pre-qualification and pre-approval from a lender for a mortgage is the next step to determine how much house you can buy.
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Not Ready to Buy a Home Yet? Here’s How to Get Started
If you’ve evaluated your financial and personal readiness for homeownership and decided you’re not quite there yet, don’t worry. Many people take time to prepare before making such a significant commitment. Here are some proactive steps you can take to position yourself to buy your first home in the future:
1) Create a plan.
Set clear short- and long-term financial goals. Break down what you want to achieve within the next year, such as improving your credit score, reducing debt, or saving a specific amount for a down payment.
2) Educate yourself.
Knowledge is power when it comes to home buying. Read books about personal finance and real estate or consult a financial advisor. Understanding the various aspects of the home-buying process, from mortgages to closing costs, will empower you to make informed decisions when you’re ready to buy.
3) Start saving.
Open a dedicated savings account specifically for your future home. Contributing even small amounts regularly can add up over time and help you build your down payment and an emergency fund. Automating your savings can also make this process easier, ensuring you consistently set money aside without thinking about it.
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4) Research housing markets.
Use this time to familiarize yourself with different neighborhoods and real estate trends. Look into factors like school districts, commuting options, and local amenities to learn how much homes cost in the area you want to invest in.
5) Consider alternative housing options.
If you’re not quite ready for a mortgage, explore renting or co-housing arrangements as transitional options. Renting can provide flexibility while you save and prepare.
Deciding to buy a house is a big step. Assessing your financial and personal readiness before making that leap is crucial. Take the time to evaluate your credit, debt, savings, and lifestyle goals. And if you discover that you're not ready yet, just remember that preparation is the key. With strategic planning and research, you'll be well on your way to buying your first home.
Get even more detailed guidance for buying a home in our free guide below.
