The process of buying a house is the biggest financial commitment most people ever make. That’s why you should make sure you’re financially ready before you start shopping for your dream home. Here are 10 common signs you’re not saving enough to make your dream of buying a house a reality.
1. You Don’t Have Enough for a Down Payment
First time home buyers are often surprised to find out just how much they’ll need for a down payment to buy a house. For those who are unable to save the necessary 5 to 20 percent needed to qualify for most conventional mortgages, there is a federally funded program through the Federal Housing Administration (FHA) that allows a new homebuyer to purchase a house with as little as 3.5 percent down.
Even so, the median home cost today is close to $300,000, according to the most recent Census Bureau data. A 3.5 percent down payment could still add up to $10,500 at that home price. “If you have not been able to save up this amount, it could be a sign that you don’t currently have the financial stability to purchase a home,” said Peter Grabel, managing director at Luxury Mortgage Corp. in Stamford, Conn.
Unless you have a family member willing to gift the funds needed for a down payment, it might be best to set up an aggressive savings strategy, cut out luxury spending and put away as much as possible until you meet your down payment goal.
2. You Haven’t Considered Closing Costs
The down payment is just the beginning of what you’re often required to bring to the settlement table. Closing costs vary, depending on where you live and the property you buy. Will Johnson, founder of Sell and Stage Real Estate in Henderson, Tenn., said homebuyers should expect to shell out between 2 and 5 percent of the cost of the home in closing costs.
Closing costs include anything from fees for running your credit report, processing your loan paperwork, attorney fees, property appraisal costs, termite and other pest inspections, the cost of recording your new deed with your city or county, and more.
To ensure you have the money available that’s needed up front, Johnson suggested lowering your overall debt, starting with credit cards. Freeing up extra dollars in your monthly budget can help you save even more toward the initial costs needed to buy your first home.
3. You Haven’t Planned for Property Taxes
Depending on where you live and how much you spend for your home, property taxes can add a little or a lot to your monthly mortgage payment. For example, New Jersey residents pay 2.38 percent of their home’s value while those from South Carolina pay just 0.57 percent. Even a smaller tax bill can add up quickly, though, and it’s an expense a renter doesn’t always think to consider.
Dave Jacobin, president of 1st Mariner Mortgage, a division of 1st Mariner Bank, suggested potential homebuyers consult an online tax calculator to estimate the cost of the annual property taxes in the area where you want to live — before you decide to live there.
4. Your Credit Score Is Below Average
Your monthly mortgage payment will be dependent upon the strength of your credit history. “Not only will a low credit score affect your ability to qualify for a mortgage loan in general, it will greatly impact what mortgage rate you qualify for,” said Jacobin. “Those with a high credit score can qualify for the best interest rates available. Those with a low credit score will likely not qualify for low rates, making homeownership financially difficult.”
The rate available for those with a high or low credit score can vary by as much as 1.5 percent — or more than $280 per month for a $300,000 home — according to information available on the consumer credit reporting site MyFICO. “Don’t rush into buying a home if your credit score is telling you you’re not ready,” said Jacobin. “Wait to build your credit score back up so you can qualify for lower interest rates, and not stretch yourself too thin.”
5. You Have a Lot of Other Debt
The process of buying a house comes involves a lot of financial tracking. Your current debt payments will be scrutinized so a lender can make sure you have enough financial wiggle room in your monthly budget to make room for your mortgage payment. Typically, a mortgage company will want to see the your total debt — like monthly auto loan payments, student loan bills and credit card balances — is less than 36 percent of your gross monthly pay.
To lower that number, known as your debt-to-income (DTI) ratio, Johnson suggested tackling credit card balances first. An added benefit is that repaying debt can often boost your credit score and save you money in interest. For those who feel they are unable to pay down debt, Johnson suggests boning up on debt repayment techniques, such as those discussed in Dave Ramsey’s book “The Total Money Makeover: A Proven Plan for Financial Fitness.”
6. You Might Move in a Few Years
“Avoid buying a house if you’re not sure how long you will be in the area or if there are other pending factors in your life that might cause you to move,” said Jacobin. He suggested five years as the minimum planned commitment to an area before even thinking about buying a home. It can take that long just to build enough appreciation in the home to recoup closing costs, depending on housing market conditions at the time you buy.
For some, however, there are advantages to renting. “When you rent, you have the freedom to bounce around and try new locations and styles without any type of long term commitment,” said Jacobin. In other words, even if you’re planning to stay in an area for the long term, it doesn’t hurt to rent while you explore specific neighborhoods and identify your perfect fit.
7. You Haven’t Planned for Home Maintenance and Repair Costs
“Typically when you rent, the property management is responsible for things like pest control, lawn maintenance and appliance upkeep,” said Jacobin. “When you own your own home, you are your own maintenance office and landlord.”
First time homeowners are often surprised at how quickly housing costs like HVAC annual maintenance and plumbing repair can add up. Jacobin suggested homeowners put aside 1 percent of the cost of the home each year for home maintenance and repair. “That way, should something need to be replaced, you won’t be hit all at once with a large expense,” he said.
8. You Don’t Have an Emergency Savings Account
Not only is it a sound financial strategy to have a stash of cash you can tap if the roof leaks, but many lenders require it. Mortgage companies look for what they call cash reserves — or the amount of money you’ll have left in the bank after all your settlement costs are paid. A mortgage lender might want to see as much as six to 12 months’ worth of reserves, depending on your credit score and our DTI ratio.
Buyers who have saved enough for a down payment, but not enough to cover the required reserves, are perfect candidates for a down payment assistance program, according to Josh Lewis, a certified mortgage planner in Huntington Beach, Calif. These programs are generally intended to make home buying more accessible to middle income Americans, many of whom are burdened with other debts, like student loans.
“Unlike a renter with no savings, these borrowers have shown the discipline to save and just need a little boost to insure they have a cash cushion after getting into a new home,” said Lewis. A real estate agent or mortgage lender can help you find a reputable program as a homebuyer.
9. You Just Started a New Job or You’re Self Employed
Even if you’ve just landed a great new job with a big pay raise, you’ll still need two months of pay stubs to prove your income to the mortgage company, said Jeffrey Taylor, co-founder and managing partner of home loan processor Digital Risk. If you’ve relocated for a new job, it can be difficult to wait a few months before you apply for a mortgage. Even so, a few months can be enough time to learn that a new job might not work out or that the geographic location might not be a good fit which means that waiting to buy a home might ultimately be in your best interest.
Even if you’ve stayed put in your career, business owners and freelancers face even more stringent income verification requirements. “You’ll need two years of tax returns if you’re self-employed,” said Taylor. Not only that, but those who experienced rapid growth within their business won’t necessarily reap the advantage of recent earnings as an income qualifier. Instead, a lender will usually average your income from the past two years, and use that number to determine the amount for which you’ll qualify.
The best way to take advantage of as much income growth as you can is to file your tax returns as soon as you can, suggested Taylor. You can’t use it if you can’t prove it.
10. Your Job or Industry Is Unstable
If you suspect your company might be downsizing, you work in an unpredictable industry or you simply haven’t been getting along with your boss, it might not be the best time to jump into homeownership. Buying a home is long-term commitment, and it’s not always easy to sell on a dime or find a renter in the event you can no longer meet your financial commitment.
Some warning signs you’re not financially prepared to buy a house, according to Mike Arman, a retired mortgage broker in Oak Hill, Fla., include not being sure you want to or can stay in the area for the next several years, seasonal employment or a job in an unstable industry. Unless you have a fairly good sense that you’ll receive a predictable income for the next few years, you might want to hold off.
Buying a house is a substantial financial commitment, one that often requires tens of thousands of dollars be brought to the closing table, along with what are often unexpected long-term costs. While it can be rewarding to own instead of rent, it’s more important to be prepared financially for the costs that come with buying a house.