As most people know, for many part of the American Dream involves home ownership. Owning a home can be awesome if everything is in order, but for a variety of reasons, there are some people who simply aren’t yet suited for home ownership.
When I bought my 1st home it was during the time when lenders were pretty much approving everyone for everything. I was not ready for a mortgage, I was drowning in debt, and I had no down payment. Still, I was somehow approved for a home loan. Little did I know that this practice was happening ALL OVER the U.S. and was the start of the subprime mortgage crisis. Since I didn’t have money for a down-payment my real-estate agent suggested that I apply for a grant through CHFA. I did and then they covered the down-payment. (On their site it now says that you don’t have to pay back the down-payment but I did have to pay mine back.) I’m thankful for the help they gave me but I really had no business buying a home at the time. My real-estate agent at the time also told me, “Everyone I know is getting approved for largest loans they can, they’re buying big houses, and they’re just getting roommates to help cover the costs!” Uhhh… thankfully I was at least wise enough to not take that completely ridiculous suggestion seriously.;)
Are you one of these people who has homes dancing in their heads? Do you spend countless hours on Zillow or Pinterest day-dreaming about what it’d be like to have a place of your very own? I was one of those people too. I totally get it.
While you may want to end the cycle of paying rent to someone else so you can start building equity in something all your own, that’s a very big decision to make. If the factors involved don’t honestly line up the way they should, you may not be ready for the investment. Below are some things to consider if you are thinking of becoming a home-buyer.
10 Signs You’re Absolutely Not Ready to Be a Homeowner…
1. Checked In With Your Credit Lately?
If you are not on top of your financial life, don’t think about applying for a mortgage. Lenders are more particular about borrowers than they have ever been before. They’re wanting to see excellent credit, a good financial history, and a safety net of cash before they are willing to approve a mortgage loan with good and reasonable terms. If your credit score is under the 730 range, work on boosting your score and cleaning up your history before approaching a lender.
2. How Much Cash Do You Have for a Down Payment?
Regardless of where your home loan comes from, you’ll need money for a down payment. Lenders will want you to have a cash amount available to be used as a down payment. Traditional mortgage lenders want to see between 10%-20% of the purchase price in your savings account. Government programs can reduce that amount to as low as 3% and the USDA Rural Development program may be willing to lend without the down payment. But face the facts—if you don’t have a cash reserve for a down payment, you’re not ready.
3. Can You Cough Up Cash for Pre-Purchase Costs?
Before you even negotiate a mortgage loan, lenders may require that you be able to cover quite a few services before they will consider approving you for a home purchase. You may need to pay upfront and out of pocket for services like structural inspections, sewer line inspections, appraisals, and overall property assessments.
4. Can You Afford the Mortgage and More?
You may calculate the mortgage amount you’ll need to pay on a particular property by doing some simple division, but there is certainly more to it than that. You’ll not only need to be able to afford the principle amount of the loan plus the interest, you also will need to consider the amount necessary each month to cover homeowner’s insurance, HOA (home owners association) fees, taxes, and other loan factors rolled into your monthly payment. You’ll also want to consider the unexpected costs that come with home ownership. If there’s a big storm and massive amounts of heavy branches come falling off the tree in your backyard and destroy the fence you share with your neighbor (it happened to me). Then, you’ll have to find the money to cover those costs.
5. Grasping the Responsibility?
Owning a home is a big responsibility financially and physically. If you are used to renting and the landlords took care of everything, you may be overwhelmed by the actual reality of owning your own place. You’ll need to be proactive with maintenance, yard work, take care of (or be able to afford) service for necessary repairs, and stay on top of every last detail of the physical structure of your home and overall property.
6. Are You Ready to Put Down Roots?
There is no point in going through the motions of getting a mortgage and finding the right property if you have no actual plans of staying in the area for any period of time. If you see yourself moving before hitting the two year-mark you could be hit with capital gains tax on your home so really think hard about where you see your life going. And, unless you plan to reside in the home for at least five years, it may be wiser to keep renting until you have some concrete ideas about where you plan to be in the future.
7. Can You Cover the Cost of the Move?
Moving into a home costs a lot of money. Don’t forget to consider the cost of physically moving your belongings to a new location. Remember that there will be hook-up fees for new services like cable and other utilities. You may need to pay for professional cleaning services or do some repair work to the new house before you can move in. A comfortable savings account should be built for this purpose long before you commit to a home purchase.
8. Are You Desperate?
Rental properties may not always be the most private, most comfortable places to live, especially if rules are strict and you are limited in what you can do. If you are thinking of buying a home just because you are desperate to get out from under someone’s thumb, take the time to really consider every pro and con. Rushing into a home purchase can have long-lasting, not-so-pleasant consequences financially, mentally, and emotionally. You may end up with a home you can’t afford or that you don’t really like. Carefully consider all of your options before moving forward.
9. Can You Keep Up an Emergency Fund?
Owning a home is likely one of the largest financial responsibilities you’ll have in your lifetime. If paying the mortgage and all of your other bills leaves no room for the stashing of cash into an emergency savings fund, you may want to hold off on a purchase until you have a sufficient financial safety net for repairs and unexpected emergencies (job loss, home repairs, illness).
10. You Look Good on Paper, But is It the Truth?
Sure, it feels good when the financial figures are final and the lender gives the stamp of approval to buy a home but you still need to do a personal reality check. While the math on paper may look great, and while you may really want to call yourself a Homeowner consider if paying for a mortgage and all the other costs is truly within your abilities. Just like when I mentioned above how it was suggested to me that I get a massive home loan and accompanying property, when I pulled out the pen and paper and was real with myself I knew that getting a huge home wasn’t something I could really even kind of pretend to be able to pull off.
It may feel discouraging to put your home purchase on hold but it’ll be worth it in the long-run when you’re on more stable financial footing, and you’re paying way less in interest every month. If it’s meant to be you’ll eventually get there. Promise. It just may take a little longer than you hoped.
Did I miss anything on the list? Are there other signs that a person isn’t ready to be a homeowner? I’m curious what your thoughts are on this.
P.S. Another idea? Consider buying, building, or renting a tiny home.
P.S. S. Have you read Are “Love Letters” the Key to Getting Your Dream Home? and How a 203K Loan Helped Us Get Our Dream Home.