Don't rush into homeownership. This kind of investment requires preparation.
Part of the “American Dream” includes a place of your own. Most of us have a goal of homeownership, and for the majority, it will be the largest investment we will ever make. Taking the leap from renting to buying is thrilling and liberating, but is also a long-term commitment and one that requires strong financial standing. Be patient as it can take time to set yourself up for buying a home. Make an honest assessment of your situation, and if any of these red flags strike a chord, you may want to delay taking on a mortgage in the near future.
Low Credit Score
If you are applying for a loan, you can’t get around your credit score. One of the most important factors in determining your loan eligibility is your credit score. The higher your score, the better your interest rate will be, which translates into lower monthly payments. You can check your credit score through free sites like CreditKarma, Credit.com, or Credit Sesame. There are a few tricks to improving your credit score if it is low, and most importantly, monitor your credit and maintain good credit practices like paying on time and regularly.
Managing your credit and debt is crucial, we cannot stress this enough. Lenders use your debt-to-income ratio (DTI) to assess your risk as a borrower. The more revolving debt you carry, the more of a risk you are to lenders, which translates into a higher interest rate and higher monthly payments. A good rule of thumb is to make sure your monthly payments do not consume more than 30% of your net income. If the combination of your debt and the amount you want to borrow exceeds 43% of your income, you will have a hard time getting a mortgage.
No Emergency Fund
We have all encountered unexpected financial setbacks. However life intrudes, the bank still expects to receive your monthly mortgage payment. Financial experts suggest having at least 6 months worth of living expenses squirreled away in a savings account to use only in case of emergencies. Defaulting on a mortgage can do major damage to your credit, and a quick sale is not always possible or equitable for a homeowner. Finance your emergency fund first. Then think about purchasing a home.
Less Than A 10% Down Payment
Yes, there are many programs that offer low down payments or even no money down on a home purchase. But trust me, it is in your best interest to put down as much as possible. Ideally, you will be able to put 20% down, anything less than that will require private mortgage insurance (PMI) tacked on to your monthly mortgage payment. PMI can cost anywhere from 0.5% to1.5% of your total mortgage, depending on the size of your down payment and your credit score. The more money you can put down toward the initial purchase of the home, the lower your monthly mortgage payment will be. This can save you tens of thousands of dollars over the life of the loan.
Moving Within 5 Years
Home ownership, like stock investing, works best as a long-term investment. In a stable market, it takes roughly 5 years to break even on a home purchase. This is because for the first few years, your mortgage payments mostly just pay off the interest, not the principal. And don’t’ forget there are closing costs when selling a home which can eat into your sale price as well. The longer you stay in a home, presumably the more equity you will build which means cash in the bank when you sell.
You’ve Only Considered The Sticker Price
There are many things involved when buying a home, and some of them are going to cost you. Besides the purchase price, there are a number of charges, fees, and taxes that add up in the closing costs, not to mention recurring tax, insurance, and utility payments.
Closing costs for a buyer can be roughly 3%-4% of the purchase price, but can be more if your lender requires any prepayment. This does not include your down payment amount.
More importantly, make sure you can afford the recurring costs on the home. Many home buyers forget to factor in maintenance costs when purchasing their 4,500sf estate. Be sure to account for everything including property taxes, home insurance, utilities, services, and maintenance in addition to your monthly mortgage payment.