First-Time Home Buying Finances: Reasons to Wait Before Purchasing a Home

The game of first-time home buying can be a tricky one. For most people, choosing whether or not to wait before purchasing a home is one of life’s greatest decisions.

Although first-time home buyers may feel excited, this is not a decision to be taken lightly. Sometimes, it is better to wait prior to going through with a home purchase.

How do you know when is the right time to purchase your first home?

First-Time Home Buying Decision Criteria

While homeownership is a dream for many, the process contains numerous moving parts. Because of this, some are not in the best financial state to go through with the transaction.

Here are some of the key decision criteria worth considering.

Financial Stability & First-Time Home Buying

Financial security is a critical component for first-time home buying. Those without a stable source of income may easily run into issues. Not only do property taxes fluctuate, before even reaching that stage, prospective first-time home buyers face a plethora of costs.

Just to name a few:

• Home Inspections

• Property Appraisals

• Potential Repairs

• Closing Costs

Similarly, lenders take credit scores into account. From the lender’s perspective, a credit score indicates financial stability. Thus, potential home buyers with better credit scores likely have a stronger chance of paying off their mortgage loan.

While a weak credit score does not necessarily bar anyone from becoming a homeowner, it does increase the challenge. For instance, lenders may seek cosigners or even coborrowers from those with weaker credit scores. In addition, a lower credit score tends to increase mortgage interest payments, costing more money over the years.

Understanding Credit Scores

But what is a good credit score for first-time home buying?

First, credit scores start at 300, and go as high as 850. Experian breaks down its ranges as follows:

• Poor — 300-579

• Fair — 580-669

• Good — 670-739

• Very Good — 740-799

• Exceptional — 800-850

For those who fall below 670, lenders generally view them as subprime borrowers. Those in this range tend to receive unfavorable mortgage loan terms compared to those in the “Good” range. However, borrowers in the “Poor” range face extreme challenges in qualifying for a loan entirely.

Debt & Savings

When first-time home buying, prospective borrowers do not need to be 100% debt-free. However, lenders look favorably upon those who demonstrate a history of successfully managing their debt.

The debt-to-income ratio exemplifies this for lenders. Essentially, the debt-to-income ratio examines the amount of debt compared to the amount of consistent income. If the debt-to-income ratio is low enough, lenders display a higher likelihood for better mortgage terms, or qualification altogether.

Aside from debt, prospective homeowners who show a comfortable amount of savings are also viewed favorably. As previously mentioned, buying a home is an expensive embarkment. Many first-time home buyers find themselves caught off guard. When purchasing a property, potential home buyers need to consider tangential expenses, such as home inspections, property appraisals, closing costs, and post-closing repairs. On average, home closing costs run between 2% and 5% of the property value.

First-time home buyers who have a large amount of savings manage the real estate closing costs easier than those who do not. Ultimately, the lender may verify that there will be enough money in the account to cover those closing costs.

The Impact of the Housing Market on First-Time Home Buying

First-time home buying is a big step. The housing market dictates many factors related to the closing. Thus, it pertains to supply and demand.

Currently, the state of Illinois (among many others) features limited housing inventory compared to the amount of home buyers. Also, home sales vastly improved after a stagnant 2020. In April 2021, home sales jumped 35.3%. Because of this, many real estate professionals and analysts characterize the current housing climate as a “sellers’ market”.

How does this affect the home buying process?

If numerous buyers compete for a single property, the seller may initiate a bidding war between the parties. Consequently, the perceived home value increases. This favors home buyers with larger financial savings and less debt because they are able to increase their property offer to a greater degree.

For this reason, it may be advisable to hold off on shopping for that dream home. Alternatively, this could instead just mean that home buyers and/or their accompanying Realtors may need to conduct further market research.

At the end of the day, conditions are rarely “perfect”. By the same token, first-time home buying requires research and patience.

While some may choose to wait, others are moving forward on their first home purchase heading into the summer. For legal guidance on first-time home buying, contact a real estate attorney at Lee Scott Perres, P.C.