Buying a house is a major financial milestone but it’s also a huge responsibility. If you’re ready to make the transition from renting to home ownership, you need to be sure that you’re financially prepared to take the leap. There are several red flags that could indicate that it’s not the right time for you to buy. We’ve put together a list of warning signs you should look out for before you take on a mortgage.
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1. You’ve Got a Heavy Debt Load
If you’re struggling with student loans, credit card debt, car payments or medical bills, adding a mortgage payment into the mix could spell financial disaster. While a mortgage is technically considered a good debt, it’s still a debt and if you default on your payments you could end up losing your home.
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A good indicator of whether or not you can really afford to buy a house is your debt-to-income ratio. This simply means the amount of your income you’re spending each month to pay down your debt. A debt-to-income ratio of 36 percent or less is generally considered manageable but anything higher means you’re in over your head. If you’re already forking over a significant amount of your take-home pay to cover your debts, it’s probably better to pay them down before buying a home.
2. Your Credit’s Not That Great
Your credit score has a huge impact on whether or not you’re able to qualify for a home loan and what kind of interest rate you’ll have to pay. A big part of your score is based on whether or not you pay your bills on time. So if you have a history of late or missed payments, your credit will likely take a serious hit.
Things like bankruptcy, judgments and tax liens can also drag your score down so if you have any of these on your credit, you could have a hard time getting approved for a mortgage. If you are able to get a loan with a low credit score, you could end up paying significantly more in terms of interest. Most negative items fall off your credit after seven years so it may pay off to wait a little longer before you buy.
3. You Don’t Have an Emergency Fund
When you’re renting, your out-of-pocket costs are typically limited to your rent and utilities. If something breaks, it’s up to the landlord to make sure it gets fixed. When you’re a homeowner, you’re responsible for maintenance and repair costs. If you have an emergency fund, then an unexpected expense is no big deal. If you have no savings at all, even a minor repair could be a major budget buster.
Lenders also take into account how much money you have in the bank when deciding whether to approve you for a mortgage loan. Having a sizable savings cushion is a good sign that you’ll be able to cover your payments if times get tough. You might still be able to get a mortgage with no savings but only if you have immaculate credit and a solid work history.
4. You Don’t Know How Long You’ll Stay
Buying a home is considered an investment, since you’re able to build equity in the property over time. The downside is that in most cases, it can take years before you start seeing any kind of return since most of your payments go towards the interest early on. If you buy a home and sell it within the first few years, you probably won’t see much benefit in terms of equity.
When you’re not sure how long you’ll stick around, renting may be a better investment than buying. If you can find a place to rent for less than what you’d pay for a mortgage, you can save the difference towards your down payment. Renting also gives you a chance to get a feel for the area and decide if you want to put down permanent roots.
5. You Don’t Have a Down Payment
Offering up a sizable down payment can lower your mortgage payment and potentially help you to get a better rate. Depending on the type of mortgage loan you’re applying for, you may be able to get buy with a down payment of 5 percent or your lender might require up to 20 percent of the purchase price. If you have some dings on your credit, the lender could ask for 25 or even 30 percent.
There are some federal programs that allow you to buy a home with no down payment at all but you may have to meet specific guidelines to qualify. Private mortgage lenders also offer zero down payment loans but there’s a trade-off, since you’ll have to purchase private mortgage insurance. Waiting to buy until you’ve saved up enough for a down payment may mean deferring your dream of home ownership a little longer but you may not have to jump through so many hoops to get your mortgage loan.
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Home ownership isn’t right for everyone but it’s better to find that out before you sign on the dotted line. While the idea of waiting to buy a home may not be appealing, taking the time to address any financial trouble spots can ensure that you’re ready when the time is right.
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