If you are thinking about buying a home, you may find that it is not hard to get carried away in your plans. However, this might be a mistake-there are many reasons why you might want to practice some delayed gratification.
There are some definite red flags that you may want to ponder before plunging into buying a home or making the decision to continue renting. Any one of them can stand alone as a reason not to buy a home.
It might still make sense to buy a home if one of these situations applies, but more than one should definitely raise a caution flag. Excluding VA loans and a smattering of first-time home buyer programs, you will need to make a down payment to finance a home purchase.
This amount can range from 3.5% of the sales price for an FHA loan, to a minimum of 10% for a conventional loan. The best interest rates are offered to those buyers with 20% to put down.
Bad credit can also disqualify you from obtaining any mortgage. Those with credit scores below 620 might find hard-money sources that will lend on a home, but the interest rates and fees will be through the roof.
A higher interest rate equates to a higher mortgage payment. If you have borderline credit, consider waiting, and make changes in your spending habits to improve your FICO score.
Lenders change the rules all the time for debt ratios. If bills eat up 50% of your gross income every month, you probably cannot afford a mortgage payment on top of those expenses.
Because lender guidelines have changed since the mortgage meltdown of 2007, your debt ratios will need to be line or you will never get through underwriting. Consider paying down or paying off your credit cards before buying a home.
If you have reason to believe that your job may be in jeopardy, now is not a good time to buy a home. Many homeowners who go into foreclosure end up in that position because they have lost their jobs.
Unemployed individuals often place priorities on buying groceries and putting gas in the car over making a mortgage payment, hoping they can make up the mortgage payments later. Instead, they tend to go deeper into debt.
If your main objective is to put a roof over your head, consider whether it is smarter to rent than to buy. In some real estate markets, it can be a bit of a stretch to meet the financial obligations of ownership while rents in those areas are 50% lower than a mortgage payment.
When prices are so high that few buyers can afford to buy their first house, you may be better off renting and paying less for that roof. Buying a house is generally a long-term commitment.
If you love the excitement of new digs, which makes you want to constantly change your environment, you may find that it is impossible to sell in a relatively short period of time without absorbing a big loss.
The reason many people buy a house is to build equity, and it’s very difficult to build equity if you’re buying and selling at the drop of a hat, especially in areas where appreciation is little or none. Although many single people buy, especially single women, often a purchase is made with a partner or spouse.
If your relationship with that person is unstable, what will you do if you’re relying on that person’s income and support to make the mortgage payment, and that person vanishes? At that point you could be facing a short sale or, at the very least, a loan modification, both of which affect credit.
People who purchase places in declining markets often watch in horror as their equity disappears when the market continues to fall. Purchasing in a falling market means if you put down 20% and the market falls another 5%, you have now lost 25% of your investment.
The only way that it makes sense to buy in a falling market is if you buy below the comparable sales. If you try to time the real estate market and buy at the bottom, your predictions could be wrong.
Make sure that you are really ready before you jump into something. After all, it may be better to rent for just a few short years, and be more prepared in the future.
Jack R. Landry has worked in real estate since 1988 as an expert on home buying and construction. He has written hundreds of articles on real estate and recommends (http://www.alwaysaffordablehomes.com) for new construction.
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