Home > Mortgages > 5 Reasons Why You Shouldn’t Buy a House Right Now

Comments 7 Comments

Heather McClane still believes in the American Dream. Even now, five years after the mortgage bubble burst and with lingering uncertainty about the housing market and the economy as a whole, McClane desperately wants to stop renting.

“I want a home so badly for my family,” she wrote in response to a Credit.com story, “especially my children.”

McClane’s dream of home ownership is further clouded by her own unpaid bills. Four years ago, McClane entered a hospital and racked up a $25,000 bill, which she never paid. That lingering unpaid bill is causing her credit score to remain stuck at 709, she says.

“Five years ago, 709 wasn’t too bad,” says Barry Paperno, Credit.com’s credit scoring expert. “Nowadays it’s pretty terrible. But it’s not far from being good.”

Between her low score and her unpaid hospital bill, McClane is finding it impossible to get a mortgage.

“I am unable to get a loan due to the massive unpaid medical bill!” McClane writes.

Here’s the surprise: Maybe that’s not such a bad thing. According to some credit experts, it’s not necessarily an injustice that consumers like McClane can’t get mortgage loans. After all, from the point of view of a prospective lender, an unpaid bill in the past might signal that a consumer will forego paying a loan in the future.

“A credit score is not a report card,” Paperno says. “It doesn’t look backwards in time. Rather, what it does is look forward and try to predict the likelihood that someone will repay a loan in the future.”

But what if McClane’s inability to buy a home right now is actually in her best interest, too? As we’ve learned from the bursting mortgage bubble, homeownership comes with risks. Even as the housing market begins to show its first signs of prolonged health since 2008, here are five reasons why people with damaged credit maybe shouldn’t buy a house right now.

1. Home Prices May Still Go Down

Just because prices have stabilized in most cities for the last few months, there is still an excess inventory of about 2 million homes in the United States, according to an estimate by A. Gary Shilling, a financial analyst. “That is huge,” Shilling wrote in the Wall Street Journal in May.

That means home prices, which already have tumbled 36 percent from their peak in 2006, will probably keep falling, Shilling says. That’s especially true since many sales moving forward will be on previously foreclosed homes, which sell at a 19-percent discount compared to similar homes.

“At current rates of housing starts and household formation, it will take four years to work off the excess inventory, plenty of time for those surplus houses to drag down prices,” Shilling says.

2. Bad Credit = Higher Rates

Forget all you’ve heard about record-low interest rates, which are hovering at about 3.5 percent. If you get a mortgage with poor credit, your interest rate will be significantly higher, warns Gerri Detweiler, Credit.com’s consumer credit expert. That high rate will cost you lots of money in coming years, no matter what happens in the broader economy.

“You may get stuck with a high interest rate and not be able to refinance it in the future if the rates go up,” Detweiler says.

Let’s assume McClane purchases a new home, which currently sells for a median price of $224,200, according to the U.S. Census Bureau. With a perfect credit score and the lowest-available interest rate, she would pay $144,383 in interest over the life of a 30-year mortgage, according to the calculator. Now let’s assume McClane purchases the same house, but her low credit score gives her an interest rate of nine percent. That causes her interest costs to multiply, forcing her to spend $428,669 just on interest.

If McClane is daunted by a debt of $25,000, imagine how she might pay a six-figure interest charge. Instead of rushing to buy a home now, she may be better off postponing such a major purchase until she can build her credit score, since doing so could save her much more than the $25,000 she owes.

3. Few Affordable Houses to Buy

Home prices plummeted after 2008. Many people who paid boom-era prices for their homes now find themselves deep underwater, and many are refusing to sell. Those houses tend to be precisely the kind of smaller, less-expensive starter homes that first-time buyers like McClane want to purchase, says Lawrence Yun, chief economist for the National Association of Realtors.

“There are notable shortages in the lower price ranges which are limiting opportunities for first-time buyers,” Yun said during a press conference.

4. Beware the Cash Trap

Making the down-payment is only the beginning. Once a consumer like McClane has purchased a home, she is in for a host of new expenses. That includes insurance and taxes, as well as unexpected things. Without sufficient money in the bank, those unexpected bills could hurt McClane’s ability to pay her mortgage, which could cause even more

“You might use up all your cash for the down-payment and then you don’t have a cushion in case the house needs repairs or you have other unexpected emergencies,” Detweiler says.

5. A Big Purchase Now Actually Hurts Your Credit

It’s a little-known phenomenon that getting a new loan or credit card now actually hurts your credit score in the short term, Paperno says. That small dip could spell big problems, especially if your new home requires other credit purchases, like a loan for a pickup truck or a credit card from Home Depot.

A lower score could make it more expensive for you to borrow money, and it might even make it impossible for you to get new credit at all, especially if your credit score is already low.

“Buying how could lower your credit, which could make other forms of credit more expensive,” Paperno says.

Image: Esther Gibbons, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • jack newton


  • Tandi

    I work at a mortgage company so I know what is expected. Obviously she will want to pay this debt off most likely by settling. Some lenders are forgiving with having a cap on medical collections but even then the balance will have to be below $20k. She should just settle or see if they can count the debt into her DTI and they can over compensate with other factors.

    But I work in an industry where everyone thinks they have to own a house and they have to do so NOW! Well doesnt always happen but we can work something out to where you can maybe qualify in 3 to 6 to 12 months.

  • http://MSN alex

    I agree with Leigh, people need to take responsibility with debts they incurred and set goals to pay them off. I am single woman and widow (and no I did not get any money from my husband because he did not have anything to leave when he passed, and no I do not feel sorry for myself), yet I work and have paid off most of my debt and my husbands debt and right now I am also paying off my student loans, and “NO” I do not make big bucks!

    Gary thank you for educating the rest of us who are ignorant about mortgages, home loans…

    Mike there is no perfect come back, except for the rest of the public who reads educational sites such as credit.com to be educated on how credit scores and mortgages work, and so forth….

  • Pingback: 5 Reasons Why You Shouldn't Buy a House Right Now | Credit.com … | Home Loans Tips()

  • Mike

    Perfect come back Gary, there are so many bandwagon jumpers who aren’t authorities or subject matter experts. Anyway I also hate this bait and switch journalism the modern day editors prefer..I read the article..true but I believe the title and focus of the article imo should have been general and less personal..because it highlights on one person’s circumstance..It’s information reads like a reality TV script…Hey Chris maybe that’s a good outlet for you.

    • http://5reasonstonotbuyahouse dv

      definitely a script job… it has fake written all over it

  • Pingback: 5 Reasons Why You Shouldn’t Buy a House Right Now | News to Watch()

  • gary alexander

    Fha provides financing with the medical collection down to scores of 620 . with 3.5 percent down and a interest rate of 3.5 today . I love it when someone that knows nothing about mortgages speculates along with the rest of the national media.

  • Pingback: 5 Reasons Why You Shouldn't Buy a House Right Now | Credit.com … | Mortgage Loans For Low Credit Scores()

  • Pingback: Why You Shouldn’t Buy a House Right Now | Divas With Cents()

  • Leigh

    We need to stop acting like someone’s inability to qualify for a home loan is a grave injustice. It’s not a right to own a home.

    McClane should address her medical debt and pay it down. Ask for a lump settlement if it has gone to collections. This is where her energy needs to be. Not in demanding material goods that she hasn’t demonstrated an ability to manage.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team