When Not to Buy a House

You've probably heard all the perks about buying a house and how it's the centerpiece of the American Dream.  But the American Dream is less about possessing the house itself than the improvement you expect in your lifestyle when you own a home.

As a real estate agent, I want you to be deliriously happy after buying a home.  To me, that means there are times when I recommend to clients that buying a house isn't the right way to go yet, particularly when the financial risk of keeping your home takes away from the enjoyment of it. 

Here are five times when I counsel clients to wait on buying a house.

1.  You're uncertain about your job.

Having a stable income is paramount in ensuring that your home doesn't turn into a financial burden, and almost everyone needs to work to bring in that money.

But if your company is considering layoffs in your division or moving their headquarters --- or you're considering a career change --- you may be forced into selling or renting out your home in short order.  Doing so is time-consuming and costs money.

You may be mentally prepared to sell your house quickly, but the market may not be so kind, and you might have to take a large loss in order to do so.

2.  You have bad credit right now.

When you take out a mortgage to buy a house, your lender charges you interest every month for the privilege, but when you have bad credit, your lender will charge you a lot more.

Why?  Because people with bad credit cost lenders money by not paying promptly or not paying at all.  And what they charge you may end up being several hundred dollars a month!  Bad credit is any FICO score below the national average 720. 

But I want you to know that if you're there, you're not alone.  The good news is that with a few months of "good behavior" you can increase your FICO score and save yourself all that money.

3.  You're already in a lot of debt.

I not only want you to be deliriously happy after buying a home, I also want you to be able to keep it for as long as you want to.  The total of a lot of student loans, credit cards, car payments, that $50,000 your folks lent you, etc.: all of this not only hurts your ability to buy a house but also your ability to keep it.

The challenge is that if you take on more debt in the form of a mortgage, you may take away your ability to pay off other more expensive debt.  At that point, you're basically paying a lot of money for money you no longer have --- a lose-lose scenario.

For people in this situation, the rule of thumb is to pay off your debt with the highest interest rate first and be careful taking on new debt.

Now, lenders will come up with all sorts of creative ways to let you max out your debt-to-income ratio --- their focus is earning money on top of the loan they sell you.  Since I don't sell loans, I can help you run the numbers so that you only take on as much debt as you're comfortable with, while keeping some money in reserve for the unexpected.

Remember, my goal is to help you enjoy your new home.  If you take on too much responsibility with debt, you may be forced to sell on terms you won't like.  (Lenders aren't bashful about this.)

4.  The only way you can afford the house is using an exotic mortgage.

Can you imagine a world where everyone had to buy a house using only cash on hand?  Very few people would own a home if the world were like that.

Lenders know this and have come up with a number of loan types (they call them products) that ostensibly help people get into their dream houses.  The most notorious of these loans is the option ARM, sometimes called a "pick a payment" mortgage.  The possibility of negative amortization from this loan means you pay less monthly but end up owning less of your house every month too.

I would never do business with someone who recommended one of these loans to my clients, and I recommend you don't do business with anyone who tries to sell one to you.

5.  You don't have some reserves after your down payment and closing costs. 

Buying your home is only the first step.  The freedom that comes with home ownership also comes with additional costs like property taxes, special assessments, home maintenance and repair work, none of which were applicable when renting.

I'd argue that if you're stretched to the point where you have zero savings left over to take care of unforeseen expenses after purchasing your home, you risk a lot of unnecessary stress, losing your house or having it fall into disrepair.

The amount you have in reserve doesn't have to be huge, but a couple month's worth of your mortgage in a readily available form like a high-yield savings account, or even stocks, can ease your mind. 

Purchasing a house is a major financial decision that stretches the finances of many families, but there's a difference between having to pack your lunch versus risking foreclosure because of a bad month.  

There are a lot of folks who want to you stretch to buy a more expensive house than you need or one sooner than you might be comfortable with.  My real estate advice is geared so that you're in a position to own and enjoy your home for a long time.