9 Signs You’re Not Ready for Home Ownership
Owning a property is an important part of living the American Dream. This is one, if not the biggest expense you’ll ever make and it’s rewarding to finally have a house that you can call your own, but don’t forget, home ownership is a huge commitment.
When you decide to buy a home, you’ll need to have a down payment ready and then you’ll have to pay for processing the purchase, a real estate agent, and then cover closing costs. More importantly, you’ll have mortgage payments that you need to pay each month for (roughly) the next three decades of your life.
You should also keep in mind that while paying your mortgage, you’ll have to pay for repairs and home improvement projects along the way so don’t get tunnel vision with the sticker price. Owning a home can come with a slew of hidden fees and unexpected expenses that can catch you off-guard. All in all, home ownership is going to be not just a one-time purchase, but an ongoing and long-term expense that needs careful consideration.
If you’re entertaining the idea of buying a home in the near future, you need to take it seriously. This is a huge decision that should not be done on a whim. In fact, you need to think of this decision through thoroughly. Otherwise, you’re probably not yet ready to buy a home.
Home Ownership Is a Big Deal
Even at a time when renting is becoming more and more common and lenders are tightening their purse strings, there’s still a lot of stock put on the importance of home ownership.
For one, owning a home is an investment. It allows you to build equity over time. Each dollar you spend on your mortgage represents a portion of your ownership over the property. Unlike other investments which depreciate over time, the value of a home (typically) increases over time, even in the face of an economic crisis. You can also use the equity in your home as a line of credit.
Second, it can become a source of passive income. You can rent a room or the whole house itself for a revenue stream that you don’t have to work for. The rent money can go towards paying your mortgage. It’s an investment upon investment, one that will pay off for long-periods of time.
Owning a home also gives you a sense of stability, community, and control over your own space. On top of that, homeowners also enjoy tax benefits for being a first-time homeowner. These are just a handful of advantages that make home ownership even more attractive. But before you go house-shopping, there are a couple of things you need to consider first.
Signs You’re Not Ready for Home Ownership
So you found a home for sale you like, in a neighborhood you love, and at a price you can afford. You’re excited to move in and already imagining the many different ways of decorating it. You feel ready to make purchase. But are you, really? Here are telling signs that you’re not yet ready for home ownership.
You Have Bad Credit
Several years back at the time of housing boom, getting a home loan was fast and easy. But over time, lenders have tightened their criteria and home financing is far easier said than done. If you’re shopping around for a home mortgage, you need to look at your credit rating first. Having bad credit can significantly derail your chances of owning a home. In fact, bad credit score is the first and most obvious red flag that you’re not yet ready.
You need to understand that lenders typically gauge a potential borrower’s capacity to pay loans by looking at their credit standing. If your credit score is less than stellar, lenders will interpret that you’re not very good at managing your finances. After all, your credit score takes into account how well you manage your credit, how much debt you have, how prompt you pay your bills, and among other financial indicators. Poor credit score is simply telling them that you might not pay your mortgage on time and even run the risk of defaulting.
Some lenders may let you get a home loan despite your poor credits score, but you also can’t expect the terms to be excellent. You could end up with a higher interest rate and expensive monthly payments. In this case, it’s a wise decision to work on improving your credit score for the next several months and reconsider the prospect of home ownership when your credit score improves.
You’re Only Doing it as an Investment
Sure, your home is an investment, but that should not be the only reason why you’re purchasing in the first place. Many people forget that a home serves a purpose and that should the first way to see it. The main purpose of a home is to have a roof over your head. That’s it.
Owning a home comes with a slew of challenges that needs to be considered. Home repairs, taxes and insurance, are just some of the things you need to prepare for. If you’re fixed with the mindset that it’s only an investment, you might not be so prepared for the financial challenges that come with it.
You Don’t Make Enough Money
Take a look at your paychecks to see if you’re making enough to meet housing-related expenses. According to experts in personal finance, your mortgage should be equal or less than 30% of your income. Do the math now. If you’ve inquired with lenders and find that their mortgage offers are more than this, it is best to postpone the purchase and work on your income first.
You must take into account that anything can happen anytime and spending too much on housing can leave you financially vulnerable. Also, don’t forget that your financial obligations as a homeowner do not begin and end with the mortgage. You’ll also need to spend for upfront and closing costs, insurance, taxes, HOA fees and other expenses.
If you don’t make enough or you plan to make some changes with your primary source of income later on, now is not the best time to buy a house. Try to improve your financial situation today and you’ll be in a much better position to buy a home later.
You Don’t Have Enough Savings
Having enough money to pay for the down payment may put you one step closer towards home ownership. However, you also need to be financially equipped for other expenses. You need to have ample savings to overcome surprise financial hurdles and avoid getting into debt during and after buying a home.
There are several unforeseen circumstances wherein savings come in handy and useful. Emergency home repairs, moving costs, and furnishing expenses should not be charged on your credit cards because you’ll only get into more financial trouble later on. Also, expect other non-housing related could occur at any time and you need to prepare for them as well. If you have the savings to use for these expenses, you’ll save yourself from a lot of financial headache later on.
Most lenders also consider how much savings you have in the bank before they approve the home loan. Having a good amount in savings ensures that you’ll have the funds to tap for mortgage payments in case things get too tight. This way, you’ll be able to build a stronger case about your readiness for home ownership and become a better candidate for the home loan.
You Can’t Afford a Down Payment
Down payment is not always required when buying a home, but it’s an essential aspect to ensure that you’ll get the best deals and rates. There are programs that allow potential home buyers to purchase a home with little to no down payment, but it also come with trade-offs. For one, you’ll need to pay for private mortgage insurance (PMI) if you put in less than 20% in down payment. At first look, the PMI may seem like a cheaper alternative if you haven’t saved a down payment yet and you’re rushing to buy home. But do consider that PMI can cost up to 1.50% of your mortgage and this can mean wasting thousands of dollars over the course of the loan.
You should aim for at least 20% of the home’s price for down payment. This percentage will already put you in a much better place for negotiating deals and rates with your lender. It also brings down your monthly mortgage as you’ve already paid for a good portion of the home’s price.
Don’t have a down payment yet? Then it’s best to save up for it than opting for the PMI. You might need to wait for some time and save, but this is a much better option because it’ll save you more money and help avoid stress later on.
You Haven’t Set Down Roots Yet
If you’re not sure about staying in the area for at least five years, buying a home at this point in time is not really a good idea. Are you well-settled with your job in this location or is there a prospect of being relocated to another area after some time? Do you want to live closer to your family in the next few years? If you answer yes, you’re better off renting a place than purchasing a home in the area.
Think of a home as a long-term investment. Your mortgage payments for the first few years go to the interest. Therefore, if you’re going to move and sell in less than five years of owning a home, you wouldn’t have enough equity over it and sort of defeats the purpose of it being an investment. Also, selling the home early won’t even get you a break-even price considering the upfront costs, closing fees and other expenses related to the purchase of the home. In short, you’d be losing money instead of gaining.
Take a good look around your area and evaluate your long-term plans. Do you see yourself spending a couple of years, if not a lifetime, in this location? What about your career goals? If you’re happy with your job and the area has a prospective job market in case you switch careers, you might be staying here a while. If not, forget the thought of buying a home and take your time considering all your options.
You’re Deep in Debt
On top of your potential mortgage payments, do you also have credit card bills, auto loans, student loans and other consumer debts to settle every month? If the answer is yes and you’re about to throw in mortgage to your monthly responsibilities and you’re off to a bad start with home ownership.
It can be easy to think that you can afford the mortgage, but think about the overall financial picture. If a big part of your income goes towards paying off your debts, you’re most likely not ready to buy a home right now. Lenders are wary about borrowers who have high debt-to-income ratio. It’s like a red flag for them that you’re not managing your finances properly so you end up getting into a number of debts.
Here’s what you can do. Keep saving for your dream home but settle your debts as well. When you’ve eliminated most or all of your debts, you’ll improve your credit score and it’s easier to handle your finances with fewer debts to think about.
You Don’t Have a Steady Job
Job stability is another factor lenders look into when determining if you’re going to be a fit home loans borrower. For instance, if you’ve been job hopping and your income fluctuates every several months, lenders won’t see you favorably in terms of job and income stability.
You want to show that your job and income is stable and that you can afford owning a home. If your income shifts from salary to commission-based when you’re about to buy a home, lenders will hesitate in giving you a loan.
Before you consider making the purchase, it is wise to evaluate your career goals first. Figure out if you’re happy with your job right now and if your income is enough to cover housing expenses. Also, consider if you’re going to be at this job / company for a long period of time and whether or not you have the opportunity to grow your income. If you won’t / don’t, you need to look for a more stable job and income in order to not just afford the home loan today, but also the expenses that come with home ownership in the long run.
You Don’t Know What Type of Home You Want
What if you’re ready to put down roots, you can afford the down payment, and your credit score qualifies you for a home loan, but you’re unsure about what type of home you want? Don’t push through with the purchase just yet.
It’s great that you have the financial aspects covered already, but if you don’t know what type of home you want, you’re not yet ready for home ownership. You need to understand that all homes aren’t the same. A single-family home can be a great option for you, your spouse, and child, but what if you’re planning on growing your family in the next couple of years? You might think that an apartment or condo is suitable for you right now, but what if you want to create a passive income stream through a rental home?
You need to consider your long-term plans when it comes to family and career and income if you want to get settled into a home right now. Each type of housing is unique, and the best option for you is one that serves your needs today and in the future.
Are you ready to be a homeowner?
Indeed, owning a home comes with a host of responsibilities, and they start well before you make the purchase. It’s easy to think that you can afford a home right now. You’re earning enough to cover your mortgage and have some money to provide as down payment. You feel like you can manage, money-wise.
But owning a home is more than just the financials. You need to look at the bigger picture. You have a family and career to consider. This is going to be a long-term commitment and making this decision can have a huge impact to different parts of your life, so don’t rush it. Take your time and be ready for the purchase so you’ll be a happy and stress-free homeowner every step of the way.