Buy Now or Wait for the Dip?
When is the Best Time to Buy a Home?

Who Can Afford a Home?

It's important to understand how much home you can afford before you get too far into the buying process. Taking stock of your finances and creating a realistic budget for your next home purchase should be one of the first steps you take.

Many financial advisors recommend using the 28/36 rule to help establish a reasonable budget. This rule asserts that your total house payment (including your mortgage payment, taxes, insurance, etc.) should not exceed 28% of your gross monthly income.

It also assumes that your total debt (such as credit cards, car payments, student loans, etc.) should not exceed 36% of your total gross monthly income.

But while the 28/36 rule is a great starting point, realistically it's a bit conservative. In fact, most mortgage lenders allow you to qualify with a back-end debt to income (DTI) ratio between 45-50% (excluding other factors).

In general, you don’t want to stretch your budget to thin and overextend yourself. When buying a new home, shoot for a debt-to-income ratio of around 40%.

If you are still having trouble establishing a budget, also consider using an affordability calculator to help determine the right payment or home price you should target for your budget.

Also, while price is a major factor of affordability, make sure to also consider other factors such as liquidity both before and after your purchase. Here are a few other questions you should ask yourself:

The bottom line is that you may be eager to buy a home now, but it won’t matter too much if you can’t afford it. You might be better off waiting until home prices ease, inventory increases, and you have your budget on a tight track.

On the other hand, if you find homes that do not overextend your budget, buying a home now and taking advantage of low interest rates may be a feasible option.

Criteria For Buying a New Home

Home prices seem to be the largest barrier for many new home buyers. But other favorable factors including lower interest rates, new affordable lending programs, and increasing credit quality have also helped to offset some of that burden.

Let’s face it, unless you have a stockpile of cash tucked away you will probably need a mortgage to buy your next home. According to the National Association of Realtors, 87% of homebuyers financed their purchase².

In general, conventional mortgage borrowers typically need a credit score of 620 or better. The good news is that recent data from Equifax shows that the average credit score in the United States sits at around 698, well above this metric³.

Furthermore, some loan programs rely less on credit score and more on other affordability criteria, pushing the minimum benchmark down to around 580.

In fact, many loan programs now allow you to buy a new home with as little as 3-3.5% down. You can even utilize state and local down payment assistance programs to help cover the difference.

Keep in mind that if you put down less than 20% you will most likely have to pay some sort of mortgage insurance premium.

Realistically, if you want to buy a new home and have a credit score above 620, enough cash to cover a 20% down payment, and a projected debt to income ratio is around 40% (with the new payment included), you should feel comfortable buying a new home.