Are You More Ready to Buy a Home Than You Think? Here’s How to Find Out

< Back to Articles | Time to Read: 5 minutes

Many renters might be closer to homeownership than they realize. A recent Zillow analysis found that millions of renters in 2022 could have afforded a house. In fact, around 7.9 million renters were "income mortgage-ready," meaning they could have managed a mortgage payment without spending more than 30% of their income.

If your lease is ending soon, it’s worth checking if buying is a viable option for you. With rising rental prices, now might be a good time to consider purchasing instead.

How to Know If You're Ready to Buy

Check Your Credit Score

Knowing your credit score is essential because it helps determine loan eligibility, down payment requirements, interest rates, and loan terms. Many potential buyers are unsure about their credit situation or worry that checking it will hurt their score. However, soft credit inquiries, like checking CreditKarma or freecreditreport.com, do not affect your score.

Here’s a breakdown of credit score ranges and what they mean:

Excellent (800-850): With this score, you’re likely to receive the best interest rates and terms on a mortgage.
Very Good (740-799): You’ll still qualify for competitive rates and favorable loan terms.
Good (670-739): You should have no problem getting a mortgage, though your interest rates might be slightly higher.
Fair (580-669): You might qualify for a loan but expect higher interest rates and potentially less favorable terms.
Poor (300-579): It will be challenging to get a mortgage, and if you do, it will come with high interest rates and stricter terms.

If your score is anywhere from "Good" to "Excellent," you might be more ready for homeownership than you think. If you think your score needs some work, that's ok too! A low credit score doesn’t always mean you haven’t paid your bills on time. It might be because you're still building credit or because you’ve recently paid off and closed credit accounts, which can temporarily affect your score.

If you’re looking to boost your credit score, here are three strategies to consider:

Pay Your Bills on Time: Consistently making payments on time is one of the most effective ways to improve your score.
Reduce Your Debt: Work on paying down existing debt to lower your credit utilization ratio, which can positively impact your score.
Keep Old Accounts Open: Keeping older credit accounts active can help improve your credit history length, which is beneficial for your score.

You should be monitoring your credit months in advance and focus on improving it if necessary—the higher your score, the lower your interest rate. Improving your credit score takes time, but Churchill can find the right mortgage plan for you, even if you’re working on your credit.

I Have a 'Zero' Credit Score

If you have no credit score, this means you are credit invisible or have a credit score of 0 with the three credit bureaus. There is more documentation involved when applying for a no credit score loan, but once approved the process is as seamless as any traditional home loan. Most lenders do not offer loans without a credit score, but Churchill Mortgage accommodates this type of loan on a regular basis with expertise.

Get Prequalified for Your Mortgage

Prequalification is when a lender takes a quick look at your finances to see how much you might be able to borrow for a mortgage. It's a simple check of your income, savings, and credit to give you an idea of your loan options. It's important because it helps you know your budget before you start home shopping, instead of looking at homes out of your price range.

Want to quickly find out how much you can afford? Try this free calculator for an estimation.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your income dedicated to debt payments such as car loans, student loans, and credit card minimums. A high DTI is a common reason for mortgage denial. Lenders usually look for a DTI of 36% or lower, but some may accept higher ratios.

If your DTI ratio is higher than 36%, here are some ways to lower it:

Pay Down Existing Debt: Focus on paying off high-interest debts like credit cards first. Making extra payments can help reduce your overall debt faster.
Increase Your Income: Consider taking on a side job or freelance work to boost your income, which will lower your DTI.
Avoid New Debt: Hold off on taking out new loans or opening new credit accounts. Keeping your debt load stable or reducing it is key.
Refinance High-Interest Loans: Look into refinancing options to lower your monthly payments, making your debt more manageable.

Additional Costs

Remember, the cost of a mortgage includes more than just the monthly payment. Here’s a quick rundown of common expenses:

Down Payment: The upfront cash you pay before starting the mortgage - 20% of the home's purchase price will secure you the best rate, but not required for every loan type.

Principal: The loan amount after subtracting your down payment from the purchase price.
Interest: The fee you pay to borrow money, calculated based on your principal.

Insurance: Homeowner’s insurance is mandatory. If you put down less than 20%, you’ll also need Private Mortgage Insurance (PMI) or Mortgage Insurance Premiums (MIP) for FHA loans.

Closing Costs: These fees cover various services and usually amount to 2-5% of the loan. They include application fees, property taxes, and title company expenses.

Signs You're Not Ready to Own a Home

While it’s exciting to think about owning a home, it’s crucial to ensure you’re truly ready for the commitment. There are several signs that you might need to wait before taking this step. If your job situation is unpredictable or your income fluctuates, you might struggle with consistent mortgage payments. A low credit score can make it tough to get a loan or result in higher interest rates, making homeownership more expensive.

Additionally, if your debt-to-income ratio is high, adding a mortgage payment could be overwhelming. Without enough savings for a down payment and emergency funds, you might face financial strain. Lastly, if you're unsure about your long-term plans or location, buying a home might not be the best move right now.

Consult a Pro

Talking to a mortgage professional can help you navigate these steps and set clear goals for buying a home. We can provide personalized guidance on what you need to qualify for a mortgage, help you understand all the costs involved, and ensure you’re making informed decisions every step of the way.

If you're still unsure if now is the time, take our quick "Are You Ready to Buy?" quiz for your free Readiness Report!