3 Signs You Shouldn’t Buy a Home

Published

October 4, 2014

Samantha Reeves is a former attorney and mortgage loan originator who now uses her expertise to educate veterans and military families about the homebuying process. She is also the senior mortgage and homebuying writer for Veterans United Home Loans. Follow Samantha on Google+ or tweet her @Samantha_VUHL.

Buying a home will be one of the biggest purchases of your life. When you’re ready to make the commitment, it can be an incredibly rewarding experience. But timing is important. Purchasing before you are financially and emotionally ready can lead to tough financial choices in the future.

Instead, choose the path of responsible homeownership and hold off on buying a home until you can purchase with financial confidence.

Here are three signs you shouldn’t buy a home right now.

1. You Have Little or No Savings

There are multiple costs associated with buying a home. With conventional financing you’ll have to put down at least 5% of the purchase price. For a $200,000 loan that’s $10,000. There are some mortgages that don’t require a down payment, such as the VA loan. But even these loans have other out-of-pocket costs such as appraisals and inspections. Do a little research into the out-of-pocket costs you’ll incur, then establish a savings plan to ensure you can cover these costs before moving forward.

Now let’s assume you have enough to cover the minimum down payment and out-of-pocket costs associated with the loan. Your next consideration is whether you need additional savings to cover household expenses your first year as well as any emergencies. As a homeowner you’ll have expenses that come up that you wouldn’t have to pay as a renter. Depending on the age and state of repair of the home you purchase, these expenses may be minimal or they may be very large.

You need a safety net in place to cover both planned and unplanned expenses and emergencies. You don’t want the first unexpected home repair to throw a wrench in your finances. Determine how much you’ll need to establish a comfortable savings for these costs in your first year. If you aren’t sure where to start, consider saving 1% of the purchase price each year for maintenance plus an amount equal to several months’ worth of mortgage payments.

2. You Don’t Have a Budget

If you want to buy a house, you need to know how much you can comfortably afford. Your lender will tell you how much they’ll lend, but that number doesn’t necessarily correspond with how much you can afford.

Purchasing a home without consulting a budget may set you up for a monthly payment that exceeds your comfort level. You need a budget so you can look at factors your lender may not consider. For example, you might contribute funds to a local charity or help a relative from time to time with their expenses.

If you don’t have a budget, now is the time to make one. Failing to consider all your monthly expenses can lead to tough calls down the road. Don’t buy a home until you have a clear understanding of your budget in order to find a monthly payment you can truly afford.

3. You Haven’t Looked at Your Credit Report

Have you looked at your credit report lately? If your answer is “no,” then you’re not ready to buy a home. Credit reports play an integral role in loan approval. In 2013, a Federal Trade Commission study found that 5% of consumers had errors on their credit reports that caused a big enough change in their credit scores to subject them to higher interest rates. Therefore, errors on your credit report could lead you to pay more for your mortgage.

You won’t know if there are errors without reviewing reports from each of the three major credit bureaus. Furthermore, correcting errors on a credit report takes time. You don’t want to find the home of your dreams and then watch it slip away because you didn’t take the time to correct errors before starting the homebuying process. Pull your credit reports before shopping for a home and get to work on correcting any errors now — you can get your credit reports for free every year through AnnualCreditReport.com. It’s also a good idea to check your credit scores to see where you stand and determine if you need to build your credit in order to qualify for a loan (and better rates). There are resources, like Credit.com, that give you free access to your credit scores.

While this article might seem to be all doom and gloom, there really is a light at the end of the tunnel. You can overcome each and every one of these hurdles. And when you do, you’ll be thankful because you’ll know that you’re entering into a long-term commitment you can truly afford. While the path to responsible homeownership may be a little longer, the security it provides is completely worth it.