4 Things to Consider Before Buying That Big Fancy House

Published

April 4, 2023

Scott Sheldon is a senior loan officer and consumer advocate in Santa Rosa, California. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.

If you have manageable debt, good credit and the means to afford a down payment, generally speaking, you are in good financial shape. However, buying the big fancy house you may qualify for may not be in your best interest. That’s because the goal is to be able to afford a home while continuing to make progress on your financial goals. So if purchasing a certain home will set you back, you should consider buying a smaller house — or saving more money.

Here are some other factors you may want to consider.

1. Job Stability

Are you comfortable with your job? If so, this creates stability, which will help you support a mortgage payment long into the future.

2. Payment to Income

Ask yourself, How much of your income goes toward the mortgage payment and other monthly obligations? Lenders will let you take on a mortgage payment with other payments, like housing, at no more than 45% of your gross monthly income, so you’ll need to know where you stand. It’s important, because this is a key indicator of true financial stability. Ideally, you want your debts to be no more than 36% of your gross monthly income. Every scenario, however, is different. You also might want to consider if your income will rise, as this impacts purchasing power.

3. Emergency Savings

The last thing you want is to have a house that’s so expensive you can’t afford to put away cash for your monthly savings, retirement or kids’ education. You need to be able to save for those things, as well as the unexpected curveballs life will inevitably throw at you.
A good rule of thumb is to have a “float,” or savings account, for emergencies. Your float account should comprise about three months’ worth of living expenses. To figure out how much you’ll need, take all of your monthly payments, including your mortgage and other housing expenses, then multiply it by three. I’m not saying to hold off on buying a house until you’ve saved for emergencies. But if you are going to buy a home, make sure you’re ready.

4. Credit Score

Typically, to receive a favorable rate on a conventional mortgage loan, you’ll need to have a credit score of at least 620 or higher. The idea is that you want your credit score to be as high as possible. So if you’re not there yet, you’ll need to work on raising your score by changing a few of your financial behaviors. That means paying off debt, lowering your credit utilization — that is, how much debt you’re carrying versus your limits — and disputing any errors you happen to find on your credit report with the issuing bureau. (You can see where you currently stand by viewing two of your credit scores, updated every 14 days, for free on Credit.com.)

Buying a house is a decision that should be carefully planned. An experienced mortgage lender (full disclosure: I am one) committed to the long-term relationship can provide this guidance to help you achieve your goals.

[Offer: Denied from a loan? It may be because of a low credit score due to errors on your report. Lexington Law can help you navigate the credit repair process so you can get back on track. Learn more about them here.