Home ownership can be a great source of comfort and joy for individuals and families. But jumping into owning before you’re truly ready could create more problems than anticipated—financially and emotionally. Before deciding it’s time to buy, check this list of signs that indicate you’re not ready yet.
1. Low or poor credit. Mortgage lenders have credit requirements. The lower your score, the higher your interest rate on monthly payments. Even if you can qualify for a loan, do you really want higher than average interest rates? Research ways to improve your credit to get a better rate. Sometimes you can make significant increases in your credit score within six months to a year.
2. Less than two years at a job. Most lenders want to see income from the same employer for a minimum of two years to ensure you have job stability. They calculate your average income based on job history for the last 24 months. If you change jobs frequently or just happened to start a new one, you may need to wait before owning a home.
3. No fully funded emergency fund. If you don’t have three to six months’ worth of living expenses saved for emergencies, it’s risky to own a home. Major life events happen – unexpected medical bills, job loss, or other financial setbacks. Whatever is going on in your life, the bank will still expect the monthly payment.
4. Heavy debt. Consider student loans, credit card balances, and any other monthly payments you need to make. Lenders typically require a debt load (which will include your potential mortgage payment) to be less than 36 percent of your gross income. You need something left over to save and live off of.
5. Owning purely as an investment. If you’ve been told it’s better to own than waste money on rent, get the full picture of ownership responsibility. Home ownership isn’t just making payments to a bank rather than a landlord. If you run into trouble with payments, defaulting on a mortgage is likely to have far greater financial consequences than not making rent. Also, consider that you need to keep putting money into a house to maintain it as well as fix things that break to keep or grow value. Of course there are also additional costs to consider: property tax, insurance, utilities, moving costs, and possibly renovations. If you’re not ready for these responsibilities, you’re not ready to own.
6. Can’t afford at least 10 percent down payment. There are certainly ways to own a home with less than 10 percent down payment, but realize that the more money put down on the purchase, the better your mortgage rate. Also, putting down anything less than 20 percent will mean you’ll pay PMI (private mortgage insurance), which could be an additional $1000 to $3,000 a year on a $200,000 home.
7. Will move within the next three to five years. Home ownership works better as a financial investment the longer you stay. It may take at least five years to break even. Realize that your mortgage payments in the first few years mostly pay off the interest, not principal. So the less time you stay, the less equity you accrue.
8. Not saving enough. Even if you do have a fully funded emergency fund, you need to continue saving money. If a mortgage and associated home ownership expenses will prevent you from saving each month, then it’s probably better to wait until you have better cash flow.
Owning a home is a great goal. Make sure you enter the process fully informed of your financial health and the new responsibilities you’ll take on as an owner. If you feel owning is a big risk right now, take the extra time to build up credit, savings, or salary to afford what makes sense for your lifestyle.
Real Estate Term of the Week
Debt Load: A term that describes a consumer’s amount of debt. It is often used to understand if you are carrying a “safe” amount of debt. Creditors look at a debt/income ratio, comparing your income with your debts to analyze whether you have an appropriate amount of debt. The debt/income ratio is figured monthly and reveals either how good or bad your financial situation is. Debt load is the sum total of all the money you owe, including a mortgage, student loans, credit cards, and loans from friends and family.