5 signs you're not ready to buy a house
I'm a big fan of homeownership. Owning a home is actually cheaper than renting in many parts of the country, and the long-term financial benefits can be fantastic, in addition to several other perks that I've written about before. However, owning a home isn't for everyone. Here are five signs you aren't ready to buy your first house -- yet.
You don't want to worry about maintenance, repairs, and other uncertain costs
When you rent a home, the rent payment tends to increase steadily over time, but this is the only uncertain cost you have to worry about.
When you own a home, you have to do your own maintenance, or pay someone else to do it for you. You'll have to cut your own grass, fix your own toilets, paint the outside of the house, etc. Plus, there are the big-ticket items that need to be replaced every once in a while, like a new roof or HVAC system. According to Angie's List, the average new roof cost $11,905 in 2014, so this is no small expense -- especially if it comes at an unexpected time.
As a general rule, many experts suggest that you set aside 1% of the home's value each year to cover maintenance expenses, but this can vary considerably.
In addition, homeowners have to deal with property taxes, homeowners' insurance, and HOA fees. These costs tend to change over time, and usually not in the homeowner's favor. While it's true that a fixed-rate mortgage payment will remain constant for the duration of the loan, the other costs of homeownership will not, so make sure you're fully aware of this before you buy.
You don't have a large down payment
To be fair, it's certainly possible to buy a home without a big down payment. You can obtain an FHA mortgage with 3.5% down, and conventional financing is even available with as little as 3% down. If you qualify for a VA loan or have excellent credit, it can be possible to buy a home with no money upfront whatsoever.
However, just because you can do something doesn't mean that you should. Buying a home with little or no money down affects you in two possible ways.
First, most mortgages (with the main exception of VA loans) require mortgage insurance with a down payment of less than 20%. The price of mortgage insurance can vary depending on several factors, but it can cost in the ballpark of 1% of your loan amount each year. So, on a $300,000 conventional mortgage with a 3% down payment, plan on an additional $3,000 per year for mortgage insurance until your loan-to-value ratio reaches 80%.
Second, the more obvious effect of putting less money down is that you'll end up borrowing more, which results in a higher principal and interest payment each month, in addition to any mortgage insurance cost.
For example, according to Zillow's mortgage calculator, you can expect to pay about $1,512 per month on a 30-year mortgage on a $300,000 home with 20% down and a 4% interest rate, including principal, interest, taxes, and insurance, based on national averages. However, with a 3% down payment, your monthly payment jumps to $1,994, a 32% jump.
You don't know what your life will be like in a few years
One of the best reasons not to buy a home is if you're unsure about where you'll be in a few years. Maybe your job isn't stable. Maybe you're single, and there's a possibility that you'll get married and have children in a few years. Or, maybe you just like a change of scenery every so often.
Buying a home is generally not worth it unless you're going to be there for a few years -- let's say at least three, and preferably more.
The reason that I say this is that real estate has historically appreciated by 3-4% per year, so to be conservative, let's assume your home's value will rise by 3% annually. Well, real estate commissions are paid by the seller, and typically equal 6% of the selling price. And, this cost is in addition to other customary expenses of selling -- such as staging the house, a fresh coat of paint, etc. If you own the house for less than three years, there is a good chance you'll lose money.
You have shaky credit
Similarly to the down payment discussion earlier, you can buy a home with less than perfect credit, but that doesn't make it a good idea. The traditional go-to option for shaky credit is an FHA loan, but these have high mortgage premiums -- both upfront and ongoing -- that you can't drop for the entire life of the loan.
If your FICO score is greater than 620, you should be able to get a conventional mortgage, but your interest rate isn't likely to be great. According to myFICO.com, a borrower with a score of 760 or above (excellent credit) can expect a rate of about 3.38%, as of this writing. With a 620, the rate jumps to 4.97%. This may not sound like too much of a difference, but on a $300,000 mortgage, this means you'll pay almost $100,000 more in interest over 30 years.
If your credit is bad, you're probably better off waiting and working on improving your score.
Your other debt is too high
When determining how much of a mortgage you can qualify for, lenders take two main pieces of information into consideration -- your income and your other debts.
Most lenders these days limit your mortgage payment plus your other debt obligations to 45% of your total income, and that's only if your credit and employment situation is good. Traditionally, the maximum debt-to-income ratio lenders like to see is 36%. Well, if your other debts eat up, say, one third of what you make, this doesn't leave much to pay a mortgage.
And, unless you live in a high-cost area, 45% of your income is a lot to commit to debt repayment. Maxing out your budget is rarely a good idea, as it leaves little discretionary income to pay for other things and to save and invest.
Buy or rent? It's not that simple
While I'm a homeowner and extremely satisfied with owning my own home, I completely understand that it's not for everyone. It wasn't that long ago when I didn't have a down payment, was unsure of my future, had so-so credit, and lots of other debts to worry about.
Having said that, I'm a big supporter of the idea that most people should aspire to own a home eventually. But, if now isn't the right time, don't rush it.
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