For most Americans, purchasing a home is one of the biggest investments they'll make. Buying a home is a major commitment because you might be paying for your home for around 30 years if you take out a typical mortgage loan. Plus, once you've purchased a house, selling can be time-consuming and costly. That's why it's so important to be smart about the home-buying process.

One of the key things potential home buyers need to decide is when it's the right time to buy a home. You can try to time the real estate market or buy when interest rates are low, or you can buy at certain times of year when you're more likely to get a favorable deal or find the widest selection of homes. Ultimately, though, you'll also need to make sure that you're buying at the right time for you, which means you need to take your personal situation into account as well. 

If you're not sure whether you're ready to become a home buyer, or if you're interested in exploring what time of the year is the most advantageous time to buy a home, we have the answers. 

Hands holding a bubble with a glowing house inside it

Image source: Getty Images.

Timing the real estate market

First things first: The best time to buy a home is when housing prices are low. When prices are low and there are fewer buyers than sellers, the market is considered a buyer's market. Buyers can get homes for lower prices and can often demand more concessions from homeowners eager to sell. By contrast, in a seller's market, home buyers may become involved in a bidding war as homeowners consider multiple offers. 

Unfortunately, trying to time the real estate market is difficult, even for professional real estate investors. If you're hoping to try and buy when prices have fallen, here are some key factors to consider:

  • Pricing trends in your area: Compare historical sales to what homes are selling for today. If home prices are significantly higher, your market may be in a bubble. Redfin provides information on pricing trends for different regions across the United States, and Zillow also has similar data. Case-Shiller home price indexes also provide data on national home sale prices, as well as prices in specific metro areas. 
  • The months of supply: Months of supply is the real estate term used to describe the inventory of homes for sale. It's a metric that looks at how much time it would take to sell all houses currently for sale based on current demand if no new homes came onto the market. You can also obtain this information from Redfin. In a balanced real estate market, there's generally around a six-month supply of housing. If the supply is lower, bidding wars are more likely to occur.
  • The time it takes for homes to sell: If houses sit on the market for a long time, it's likely a buyer's market. But if homes are selling very quickly, it's a seller's market -- and you can expect to pay more for a home. Redfin provides details on the days-on-market for sold homes. 
  • New construction: When new construction lags, this keeps housing in short supply and puts upward pressure on prices. The U.S. Census Bureau provides data on new residential construction. 
  • How housing prices compare to income and employment: The housing market is overvalued in your area if prices are high in relation to the income of local residents. This isn't a sustainable situation, so prices are likely to fall. The National Realtors Association publishes data on home affordability to provide insight. 

Even with a careful assessment of market conditions, it's challenging to predict what home prices will do. Still, if prices are very high in your area -- especially relative to local incomes -- this could be a sign of a housing bubble. In that case, it may be worth waiting so you don't overpay for a home that might quickly fall in value if the bubble bursts. 

Comparing renting vs. buying

Another key factor to consider when deciding whether now's the right time to buy a house is whether it makes more economic sense for you to rent or buy in the market where you live.

The price-to-rent ratio can help you compare total costs of owning a home versus total costs of renting a similar property. The cost comparison typically considers total rental costs to include rent and renter's insurance, while total ownership costs include mortgage payments, real estate taxes, closing costs, homeowner's insurance, and any homeowners' association (HOA) dues. Ownership costs also take into account favorable tax benefits for homeowners, such as a tax deduction for mortgage interest. 

You can calculate the price-to-rent ratio yourself by comparing mean or median home prices in your area to average rental prices for comparable properties. Zillow provides data you can use to do this calculation, and Trulia has a calculator you can use.

If you could rent a comparable home for much less than the cost to buy, it may not make sense to sink your cash into real estate. Instead, you may be better off renting and investing the difference. However, if you can buy a home for much less than it would take you to rent a similar property, this is usually a good indicator that it makes financial sense to purchase. 

Evaluating interest rates

Another factor to consider is whether interest rates are high or low. If interest rates are high, borrowing money for your home will cost more. If interest rates are low, your mortgage payment will be smaller and you'll pay less in interest over the life of your loan. 

Predicting interest rates, like predicting home prices, is difficult. The Congressional Budget Office and the Federal Reserve both provide projections on interest rates, as do many experts. Freddie Mac also provides details on historic and current mortgage interest rates. 

If you think interest rates are going to rise soon, buying your home now to lock in your low rate would be advised, but if you believe rates will fall, then it can make sense to wait. 

Choosing the right time of year

Home prices not only vary over time, but they can also vary over the course of the year.

Supply and demand are big reasons why house prices change with the seasons. Summer has proved to be the most popular time to move and is a popular time for sellers to put their home on the market. While you'll likely see more inventory in the summer, it's the worst time to buy if your goal is to get the best deal because prices rise when demand increases.

Price increases in the summer can be dramatic. One 2009 study found prices are between .86% and 3.75% higher on average during the summer months than the winter months. A 2013 study using data from 138 different statistical areas also saw pricing variation from month to month, with prices at their highest in June and July.   

Chart showing seasonal variation in housing prices

Image source: Journal of Housing Research, Volume 22, Issue 1.

While this data suggests you should buy during the winter months, a lower supply of housing may mean it's more difficult to find your ideal home. In fact, one reason housing prices may be lower in winter is that buyers aren't able to find homes that match their preferences as closely with fewer houses on the market, so they aren't willing to pay as much of a premium. 

If you can find a home you like in winter and pay less for it, this is a smart financial and personal choice. But if you aren't able to find a home that's a good fit, you'll need to decide whether to settle for what's available or wait until inventory expands as the warmer months arrive. 

Making sure your personal financial life is in order

The real estate market, interest rates, and home prices in your market all play a role in determining if the time is right to buy a house. But the single most important factor in deciding whether it's time to buy is whether you're personally ready to make a home purchase. That means you'll need to have your financial life in order.

Some of the key factors to consider before you buy a home include:

Your income

Most financial experts recommend you keep housing costs to 30% of your income or less. If you can't find a home that's affordable based on this ratio, consider waiting to buy until your income increases or you've moved to an area with a lower cost of living where your home won't take such a large percentage of your take-home pay.

Many home buyers are housing-burdened because their mortgage, property taxes, insurance, and other costs exceed 30% of income. While you technically can purchase a home that will put your payment above this threshold -- as long as you meet qualifying criteria for a mortgage -- it will be much harder to accomplish other goals such as saving for retirement. 

You'll also want to consider how long you've been earning your income and how stable your source of income is. Typically, mortgage lenders want to see steady income for at least two years. If you just increased your income last month, lenders may consider a lower amount when deciding how large a loan they're willing to give you. And if you have reason to suspect you'll lose your job or see your income decline, buying a home and committing to a mortgage is probably a bad idea. 

Your credit score

Your credit score makes a big difference in your mortgage interest rate. As of May 29, the national average mortgage rate for a borrower with a FICO score above 760 was 4.251%, while the average mortgage rate for a borrower with a FICO score between 640 and 659 was 5.294%.

If you borrow $300,000 at 4.251%, your monthly payment would be $1,476 and the total cost of your mortgage would be $531,358. But if you borrowed instead at 5.294%, your payment would be $1,665 and the total cost of your mortgage would be $599,327. Having a lower credit score would cost you $2,268 per year, and you'd pay almost $68,000 more for your home. 

Because the costs of bad credit are so high when borrowing a large amount over a long time, it's often worth waiting to buy a home until you've improved your score. You can raise your credit score by developing a history of on-time payments and reducing the total debt you owe so you have a better credit utilization rating.

If you have a late payment on your credit report, ask your lender if they'd be willing to remove this black mark on your record as a courtesy. Many lenders will, in most circumstances, if you've reliably paid on time. And check your credit report for errors as you don't want incorrect information lowering your score. 

Your down payment

In 2017, the median down payment for a new home purchase was 10%, according to the National Association of Realtors. A down payment below 20% means you'll have to pay private mortgage insurance (PMI)

PMI protects your lender in case of foreclosure -- the insurance pays the lender if your home is foreclosed on and sells for less than you owe. Although you're the one who pays for PMI, you don't benefit directly. PMI has an annual cost equal to between .5% and 5% of the total loan amount, depending on your credit, the total loan cost, and the amount that would likely be paid out if a claim was made on the insurance. On a $300,000 loan, if PMI costs equaled 1%, you'd pay $3,000 annually or $250 per month. 

Not only is paying PMI a waste of money but buying a home with a low down payment or no down payment can be a big mistake for another reason: It leaves you very vulnerable to fluctuations in the real estate market. 

If you buy a home with just 10% down and home prices fall even slightly, you may need to come up with cash to bring to closing if you must move -- or you could be forced to ask your lender if you can do a short sale, which could ruin your credit. 

Home values wouldn't have to fall a full 10% for you to find yourself in financial trouble if you made just a 10% down payment. You have closing costs to pay if you sell, along with around 6% in commission to a realtor, so even a slight drop in the price of a home could mean you're effectively underwater, because you wouldn't generate enough from the sale to pay off your mortgage and other costs of selling. And the smaller your down payment, the more likely it is you'll end up in this situation. 

Waiting to buy a home until you can put at least 20% down gives you a financial cushion so if you need to move but your house isn't worth what you paid for it, you won't be in dire financial straits. 

Your savings for closing costs

When you buy a home, you'll need money in the bank for closing costs. Home buyers typically pay around 2% to 5% of the value of the property in closing costs, according to Zillow. In April 2018, the median price of a new home was $312,400, according to the U.S. Census Bureau. Assuming you paid at the low end, you'd be looking at closing costs of around $6,248. And these costs could go higher. 

Closing costs cover expenditures for home appraisals, land surveys, loan applications and origination fees, property taxes, transfer taxes, recording the deed, a home inspection, title insurance, homeowner's insurance, and more. While some home buyers borrow for closing costs and roll the costs into their loan, this would mean paying interest on closing costs over several decades. Borrowing would also adversely impact your loan-to-value ratio. The loan-to-value ratio is the amount of your loan compared with what your home appraises for. It usually needs to be below 80% so that you qualify for the best interest rates and avoid PMI. Borrowing an extra $6,248 means you may no longer be within this ratio. 

Your emergency fund

Having an emergency fund is important before you buy a home, for a few reasons.

First, it can protect you from being foreclosed on. Foreclosure can happen if you're unable to afford to make payments on your home. Having an emergency fund valued at three to six months of living expenses -- including your mortgage -- ensures you can keep making mortgage payments for a long time in the event of a job loss or other financial calamity. 

You also want to ensure you can afford the costs of home repairs. As a homeowner, you can't just call your landlord if the roof leaks or the water heater breaks. You could regularly incur expenses of several thousand dollars or more once you own a home. And the older your home is, the more likely it is you'll incur big costs. 

While ideally you'll save a home-maintenance fund and put aside around 1% to 2% of the value of your home each year for routine repairs and big projects, many home buyers have little or no money set aside after saving for a down payment. If you don't have a home-maintenance fund or emergency fund, you could end up in debt if something goes wrong.

Savings for the move and getting your new home set up

When calculating how much you need in savings, don't forget to factor in the cost of moving. You may need to pay professionals to move your possessions or may need to rent a moving truck and purchase moving boxes. When you've moved into your new home, there may also be furniture and other incidentals to buy. 

The costs of getting set up in your new abode can be several thousand dollars. Make sure you're prepared so you don't end up in debt for furniture or sleeping on the floor of your new house. 

Your other debts

Finally, it's important to consider whether you have a substantial amount of other debt.

Mortgage lenders look at your debt-to-income ratio when deciding if you can qualify for a loan and what your interest rate will be. Your debt-to-income ratio equals total monthly payments on your debt -- including mortgage costs -- divided by your gross monthly income. If you gross $4,000 per month and have total debt of $2,000, including a $1,400 house payment, a $300 car loan, and a $300 student loan payment, your debt-to-income ratio would be 50%. 

Most mortgage lenders will not give you a loan if your debt-to-income ratio exceeds 43%. Unfortunately, this can make it difficult for you to purchase a home if you have many financial obligations or a substantial amount of student loan debt. 

If your debt-to-income ratio is too high for you to qualify for a mortgage, you'll have no choice but to wait to buy a home. You can work on paying extra money toward your debt to bring your ratio down, or consider purchasing a cheaper home so your housing costs are lower and you fall within the 43% ratio. 

Thinking about your short-term and long-term goals

If your finances are in order and market conditions are good, it still may not be the best time to buy a house. You also need to consider what your future plans are. 

In particular, make sure you're going to stay in the same place for a while. This is important because a home is a very illiquid asset. Eighty-nine percent of homeowners used a real estate agent or broker to sell their house in 2017, according to the National Association of Realtors. This means most home sellers who listed their homes paid commission. Since commission averages about 6% of a home's value, the costs are substantial. You'll also have closing costs to pay when selling your home. 

In order for your home to hopefully appreciate enough in value to cover the cost of a sale, most financial experts recommend buying a home only if you plan to stay for at least two to five years. Of course, there are never any guarantees about what the housing market will do, but the longer you stay put, the more likely it is you'll break even on the home purchase even after paying costs associated with a move. 

You also don't know how long it will take to find a buyer, so if you suspect you may need to move quickly, tying yourself down with a home is a bad bet. 

So, is now the best time to buy a home?

As you can see, there's no one right answer to the question of when is the best time to buy a home. By considering your personal financial situation, your plans for the future, and the state of the real estate market, you can make a fully informed choice about whether now is the right time for you to buy.

Ultimately, buying a home is not just a financial investment, but it also gives you the opportunity to set down roots and build traditions. It can be a great purchase -- just as long as you're responsible about when and how you buy. 

Christy Bieber owns shares of Redfin. The Motley Fool owns shares of and recommends Zillow Group (A and C shares). The Motley Fool has a disclosure policy.