The leap from renting to buying can be a tremendously thrilling and liberating one, and for many, it signifies the realization of the American Dream. At the same time, buying a home is a big decision, signifying a long-term commitment that requires strong financial standing and dedication to the home you’ll be buying.
If any of the below signs apply to you, you might want to reconsider purchasing a home (for the time being):
Your Credit Score is Low
Before purchasing a home, one of the many tasks you’ll need to undertake is checking your credit score. The higher your score, the better the interest rate on your mortgage will be. Having good credit will allow for lower monthly payments, so if your score isn’t great, you might want to wait until it is before buying. You can check your credit score at no cost through sites such as Credit Karma, Credit.com, or Credit Sesame.
You’re Buying a Home as an Investment
If your first response when being asked why you’re buying a home is that you’re tired of wasting money on rent or because doing so would be a good investment, there’s a good chance you’re not mentally prepared for the responsibilities that come with home ownership. The average price increase of a home across the country over the last 100 years is only about 3%, and factoring in extra costs and inflation, it’s not a tremendous investment (unless you get lucky). For most, looking at a home for purchase should revolve around their non-monetary goals, such as it being located in their dream neighborhood or it being a good place to start a family. It’s important to look at your home as a utility, not an investment.
You’d Need to Direct >30% of your Income Towards Monthly Payments
Most personal finance experts agree that your total monthly payment shouldn’t consume more than 30% of your take-home pay as a rule of thumb. If your monthly payments are greater than 30%, your finances will be tight, leaving you financially vulnerable when things inevitably go wrong.
You Don’t Have a Fully Funded Emergency Savings Account
Everyone, at some point in time, receives an unexpected financial setback. It could be someone getting sick, an insurance company denying a claim, the loss of a job, and so on. Regardless of what’s going on in your life, however, the bank will continue to expect to receive their monthly mortgage payments. Making sure your emergency fund is fully financed (anywhere from 6 months to 2-3 years of living expenses) is a sure-fire way to make sure you’ll be able to afford those pricey mortgage payments once you’re ready to buy the home you’ve always wanted.
You Aren’t Saving
Even with a full emergency fund, would-be homebuyers should be able to save money for other goals. If you’re saving money each month, that’s a sign that your cash flow is in good shape, which is a good indicator of your ability to buy a house. If you can’t spare anything more than the mortgage payment itself, you might want to wait to purchase a home until your cash flow is more stable.
You Can’t Afford a 10% Down Payment
As another good rule of thumb, you’ll want to put off buying a home until you can afford to put at least 10% down. In an ideal situation, you’d be able to put 20% down (anything lower and you’ll have to pay for private mortgage insurance, which is a safety net for the bank in case you can’t make your monthly payments). PMI can cost .5-1.5% of your mortgage, which could be an additional $1,000/year on a $200,000 home.
The more money you’re able to put down towards the initial purchase of your home, the lower your monthly mortgage payment will be. By borrowing less money to finance your home, you’ll be able to save tens of thousands of dollars over the life of the loan.
Source: Business Insider