Am I Ready to Buy a Home? A Self-Assessment Before You Start

Hi everyone, I’m Wynn, the curly-haired realtor selling homes in Los Angeles. A lot of people ask: should I buy a home? Or, more directly, can I actually buy one right now? Before you start touring properties, it helps to look at your finances, the difference between buying and renting, and any down-payment assistance that may be available.

Start with three financial indicators

1. Credit score

• Conventional loans often look for a credit score around 600 to 620 or higher.
• With a score around 740 to 760 or above, you may have a better chance of qualifying for a favorable rate.
• If your score is lower, an FHA loan may accept a score as low as 580, depending on the full application.

2. Income stability and repayment capacity: DTI

Lenders commonly ask for two years of income documentation. W-2 employees should prepare their W-2s; contractors often need two years of 1099s; and business owners generally need personal and business tax returns.

These documents help the lender evaluate your DTI, or debt-to-income ratio. Monthly mortgage payments, property taxes, HOA dues, minimum credit-card payments, and required expenses such as a vehicle lease are included in the calculation. Total monthly debt is often expected to stay below about 50% of gross monthly income. W-2 income is generally evaluated before taxes, while 1099 income is often based on net income after expenses.

3. What can you actually afford each month?

Suppose you can put $5,000 per month toward principal, interest, property taxes, and insurance. Using a 6.75% interest rate, a 30-year loan, property taxes around 1.221%, and insurance around 0.35%, you might qualify for roughly a $600,000 loan before considering other costs.

This is only an estimate. A lender will evaluate your income, credit, debts, and loan plan to determine the actual amount. The important first step is to understand your comfortable monthly payment, then work backward to the home price.

A 20% down payment is not always required

Many people assume they must put down 20%, but that is not always true. Some buyers put down 15% or even less. A smaller down payment usually means a larger loan and a higher monthly payment, so do not look only at the cash needed to get in. Include the ongoing monthly cost in the calculation too.

When does buying or renting make more sense?

Buying

• Advantages: You build equity, have more stability, and may receive tax benefits.
• Tradeoffs: The upfront down payment is higher, monthly fixed costs increase, you take on maintenance responsibilities, and your flexibility is lower.

Renting

• Advantages: More flexibility, lower upfront costs, and fewer maintenance responsibilities.
• Tradeoffs: You are helping the landlord build equity, housing stability may be lower, and you cannot always change or plan the space exactly as you want.

After renting for so many years, my biggest regret was not having a space that was truly mine, arranged the way I liked it.

If your finances allow it, I usually encourage people to seriously evaluate buying. Even when interest rates are higher, refinancing may be an option later.

For a first home or primary residence, you do not need to overreact to short-term price movement. If prices rise, the price of the next home you move to may rise too. If prices fall, the next home may also be relatively less expensive. A primary residence is different from a pure investment because it also provides real value as a place to live.

As long as your fixed monthly costs, including interest, insurance, and property taxes, are not dramatically higher than rent, buying may be worth including in your long-term plan. Real estate often uses leverage, which can amplify returns when an asset appreciates. That is one reason many people hold real estate over time.

California down-payment assistance: California Dream for All

California Dream for All is offered through the California Housing Finance Agency, or CalHFA. It is generally lottery-based, and the available funding and number of spots can change each year. Past versions of the program offered assistance of up to 20% of the purchase price or $150,000.

This is not simply a grant. It is a shared-appreciation loan. When the home is eventually sold, the buyer generally repays the original amount plus a share of the home’s appreciation based on the amount borrowed. If income falls between 80% and 120% of the area median income, the share is calculated according to the program rules; if income is below 80% of AMI, the shared-appreciation portion may be discounted.

• You must meet the income limits.
• At least one borrower generally needs to meet the First-Generation Homebuyer requirement, meaning their parents do not own a home in the United States.
• All borrowers generally must be first-time homebuyers, meaning they have not owned a home in the last three years and cannot live in a home owned by a spouse.

Buying a home is not a decision based only on the list price. Once you organize your credit, income, monthly payment, down payment, and life plan, you will have a much clearer sense of whether you are ready for the next step.