Despite what you've heard, buying a home is not for everyone. Pre-Depression, many people who shouldn't have purchased homes in the first place, went against their better judgment by doing what "so and so" said they should do and ended up worse off for it.
The old-school home-buying rules (well, not your granny's old school, more like 7 years ago old school) told us:
A. To buy as much home as we could afford, ahem, qualify for, with as little money down as possible.
B. To buy the biggest McMansion in the neighborhood so everyone would know we “made it.”; or
C. We'd always make money, because homes "always appreciated."
Now that we know how awful that advice was, what do we do? Well, it's time to figure out if you happen to be one of the people who probably shouldn't be buying a home right now.
Here are five personalities who may want to wait before they buy:1. The Wanderer. Don’t buy a home if you don’t plan on being there for more than 5 years. What’s the point? 99.999% of your monthly mortgage payment will go towards interest and barely scratch the surface on your principal. Considering the amount of money it will take to get into the home and then maintain it, if you only plan on sticking around for a few years, then save yourself, your sanity and your wallet the trouble and just rent until you think you’ll stay for a significant amount of time.
2. The Naive. Don’t buy a home if you don’t understand the market in your area. Who cares what economists say about the housing market nationally? That’s a great place to start, but please don’t stop there! It’s important to understand the city in which you live. Every market is unique. Research the stability of the local job market with a specific interest on your potential industry or those you may be interested in long term. Check local foreclosure statistics. No matter how cheap your house was, if folks keep foreclosing at rapid rates, you may still stand to lose money in the long run. Analyze how long homes in your area of interest stay on the market. If homes similar to those you are entertaining don’t seem to resell well, then you may consider changing your criteria.
3. The Chronically Indebted. Don’t buy a home if more than 20% of your income is going towards DEBT. . . . Especially credit card debt! This is self explanatory, but let's just say, why make a bad thing worse? If you're having a difficul time paying off $5k, why would $200k become any easier?. . .Does this also include “good debt” like student loans? Of course! I don’t believe there’s any such thing as “good debt!” The only good debt is the debt you pay off. Contrary to popular belief, student loans do “count” whether you're simply building a budget or examing debt ratios in order to purchase a home. If anything, educational loans are the debt to be most concerned with! Not even bankruptcy can erase student loans. Owning a home creates additional responsibilities and financial obligations. If a large portion of your income is already going toward debt, adding a new debt is not going to improve your situation, so payoff as much as possible beforehand.
4. The Anti-Saver. Don’t buy a home if you haven't saved for the down payment. The days of 100% financing are basically obsolete. You MUST have something to contribute in order to buy a home these days – ideally 10% to 20% down. The lender needs to know that you have a significant stake in this investment, as well, and won’t just bail at the first sign of trouble. Putting some of your own hard earned money into the transaction will typically show this. Although there are down payment assistance programs you should definitely go after, that should be an additional source of help – not the ONLY help! If you don’t buckle down and strategically budget and manage your money before buying a home, trying to do so afterwards will not necessarily help. And remember, you may need the money for more than just the down payment. Closing costs, all the fees associated with purchasing the home, are not always covered by the seller in the transaction either.
5. The Unrealistic. Don’t buy a home if you don’t have a reserve account for repairs and regular maintenance. The reality is that the week after your deal closes a toilet will overflow or a pipe will burst. Things beyond your control will inevitably happen and you must be prepared tackle them head on. There’s no taking the repair cost out of your mortgage like you did with your rent; those days are just gone! And beware, because home warranties and/or homeowners insurance don't cover everything. So stash away at least $1000 above what you save for your down payment, closing costs, and of course, furniture, so that when you do move in, a household inconvenience doesn't become a life catastrophe.
Just remember that owning a home isn’t for everyone at everytime. I'm not saying never buy a home, but make sure when you do, you're actually ready for all that comes along with it.
Until Next Time,
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