Buying a home is a major life milestone. You could say it’s right up there with landing your dream job or getting married. Your heart might be set on becoming a homeowner- and for very good reason. Homeownership is a key driver of wealth in America, and for many people, represents much more than a financial investment- it represents stability
Although stability and wealth both sound like great things to have, you may want to hold off if there are existing red flags that might indicate you’re not yet ready to make the leap.
Whether it’s too much debt, a lack of savings or a wanting a carefree lifestyle, there are several reasons why potential homeowners might want to delay a home purchase. Here are four of them — and advice on how to overcome these obstacles.
1. You have too much debt
To get approved for a mortgage, you must show you can handle all of the expenses of owning a home (including the ones that aren’t rolled into your monthly mortgage payments). You also have to meet your other financial obligations, and that might be a challenge if you already have a mountain of debt on your plate.
Your mortgage lender is going to take into HEAVY consideration your DTI (debt-to-income) ratio to determine how much home you can comfortably afford.
Now these calculations don’t take into account expenses such as schooling, daycare, utilities, healthcare, etc. It only calcualtes debts that are currently reporting on your credit reports, such as car loans, student loans, credit card debt, and any outstanding collections or charged-off account balances.
How to overcome it: If you’ve accumulated a lot of debt over time, consider a personal loan to consolidate them into one, with a preferably lower-interest, monthly payment. And avoid getting sucked into a new debt trap by cutting spending and diligently paying down existing debt.
2. Your credit isn’t “great”
Your credit history and credit score are the determining factor behind the mortgage pricing you’ll receive — and that impacts your monthly payments for the life of the loan.
A good place to start before shopping for a mortgage loan is to check your credit and see where you measure up. You can get your free credit report from www.annualcreditreport.com. However, if you want your true FICO scores that a lender will use, head over to www.myfico.com to get started.
If your credit scores aren’t in the best of shape, it may be best to wait to buy and work on your credit. Here’s why…
Let’s do a quick calculation for two borrowers applying a 30-year, fixed-rate mortgage for $300,000 with 10 percent down. Jennifer has an excellent credit score of 720 and was offered a 4.75 percent interest rate and Sarah, who has a lower score or 620, was offered a 5 percent interest rate. Sarah’s monthly payments are roughly $41 more than Jennifer’s but where she really gets dinged is in overall interest paid. Sarah will pay nearly $15,000 more in interest of the loan’s lifetime because she didn’t get a lower interest rate.
Don’t believe me? Check out this amortization schedule/calculator and do the math yourself.
How to overcome it: To boost your credit score, pay your credit cards and other debts on time and tackle any negative marks on your credit file like collections, late payments, charge-offs, defaulted student loans, etc.
We talk about how to do that in our Flawless Credit Guide.
Ideally, credit cards should be paid off in full every month, and avoid opening new credit lines, loans, or any other debt obligations before applying for a mortgage.
3. You don’t have enough money saved
Buying a house comes with a lot of upfront expenses that go beyond your monthly mortgage payment.
You can expect to pay 2 percent to 4 percent of a home’s purchase price in closing costs. Plus, there’s the down payment (anywhere from 3 percent to 20 percent of the purchase price, depending on your loan type), moving expenses, appraisal, home inspection, and earnest money to factor in.
Not to mention some other hidden costs of homeownership that take many new homeowners by surprise. These might include homeowners association dues, condo/assessment fees, routine maintenance, utility bills and major repairs.
How to overcome it: To save more, pay yourself first by depositing a set amount from each paycheck into a savings account. Cut back on unnecessary spending such as monthly subscription services, eating out, impulse shopping and other acts of consumerism.
What also helps is having an emergency credit card in the event you don’t have enough cash on hand to pay for major work, such as roof repairs, furnace/AC replacement, major appliances, etc.
Depending on your income and credit profile, you may qualify for homebuyer assistance programs that can help you pay for down payment and closing costs for a home.
4. You want a carefree lifestyle
If you’re someone who moves frequently, buying a home might not make financial or practical sense.
Lifestyle plays a huge role in the decision to rent versus buy. Another thing to consider if you don’t tend to sit still: it might be a hassle to sell your home or rent it out eventually. Home values can go up or down over time so there are no guarantees that you’ll be able to sell.
How to overcome it: Take time to consider your lifestyle factors that impact your housing choices, including whether you plan to move around a lot, your ability keep up with and pay for ongoing maintenance, your commute, and current or future family needs.
Take your time. This will be one of, if not thee most, expensive purchase you’ll ever make in your life. Make sure it’s one you’ll feel good about.
One last thing
Because we know homeownership is a big deal, we want to prep you for the biggest step in your life. Which is why we created the Ultimate Homeowners checklist. It’s simple, straight-forward, and a complete guide to claiming the keys to your dream home- without stressing yourself out.
Download the checklist and start shopping.