When Not to Buy a House
by Alex Wang on Feb 01, 2007 | 15 Comments »
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.
Image of Crooked House
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.
(c) Steve Leung for the Silicon Valley Real Estate Blog at 1SiliconValley.com
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Categories: Bay Area Real Estate, Home Buyers
on 01 Feb 2007 at 7:15 pm1eddy
Also remember that mortgage lenders have been quite willing to let you get into a dangeroulsy tight financial situation in order in order for them to make more money. However, now that 17 sub-prime mortgage lenders have gone under since mid-December it does look like most lenders are becoming more cautious. There’s a lot of corruption in the mortgage industry that is hopefully getting shaken out. That will also reduce the number of available buyers which will hopefully help to moderate home prices over the next few years.
So if a mortgage broker tells you that it’s just fine if your housing costs ( mortgage payments, insurance, prop tax) are 33% of your gross income you must be very wary. In the ‘old days’ (before the late 90s) that ratio was 25% and that was pretty strictly adhered to by lenders. Its been floating up in recent years, first to 28% and now it’s often 33%.
on 02 Feb 2007 at 12:31 am2Jay
Your reason listed for not buying a house are all the reason FOR buying a house.
First of all…if someone has bad credit; by buying a home their credit score will go up within a few months because of their 1st and 2nd Mortgage they have.
Also why would someone want to make a down payment in the first place?
Why not put that money in the Shanghai or Karachi stock market (last year they both went up over 80%).
This is a great time to buy a home:
#1) We are in a down market..homes are languishing on the market for at least 6 months now…you can get a great deal now..versus only a few years ago homes were in a bidding war.
#2) Either your gonna pay the rent to the landlord and own nothing after your done….or you can buy a home, get that that mortgage and as home prices rise and your equity goes up….when you move you will have made a profit from buying your house.
Buying a home is a great choice to make.
Of course you dont want to buy more-home-than-you-can-afford.
Mortgage professionals are the good guys..previous comments mentioned corruption in the industry.
That ‘corruption’ is there so its easier for more people to qualify to buy a home.
on 05 Feb 2007 at 7:57 am3DL Fan
I think you must have mistyped your name because I’m pretty sure it is David Lereah. Either you’re him or you’ve been smoking the same type of stuff he has been smokin.
For example item #2.
#2) Either your gonna pay the rent to the landlord and own nothing after your done”?.or you can buy a home, get that that mortgage and as home prices rise and your equity goes up”?.when you move you will have made a profit from buying your house.
- In most areas it isn’t too hard to find a place that is cheaper to rent than buy. I’ve lived in 5 different states in the last 10 years and time and time again it was not too much work to find a nice rental that was cheaper than a mortgage payment (sane mortgage like a 15 or 30 year fixed).
- You’re assuming that home prices are going to rise and we’re not going to see something similar to Japan’s market.
- You’re again assuming that the home prices rise (if they’re rise at all) enough to recoop your purchase price plus all associated fees.
on 05 Feb 2007 at 8:20 pm4Kevin Boer
Congrats on the Carnival win! This is good, solid home buying advice, and I think it improves our credibility as real estate professionals if we don’t do the David Lereah “it’s always a good time to buy” song and dance. Number 6 on your list might be, “If you’re only going to be in the home a few years.”
on 10 Feb 2007 at 8:52 am5Toby
This is a very tought-provoking article and makes a lot of great points.
Is there evil in the mortgage and real estate world? Of course. But, then there is in every possible business (Enron?). The key is to work with someone that you trust — and know your limitations.
It often amazes me how much someone will tell me (as a licensed agent in Ohio) about themselves in a 30 second phone call. Last week, in 30 seconds a woman told me their house had black mold and that it was making them all very sick, they had to move, they had bad credit, etc.
What did she just do? She just set herself up to be taken advantage of. Fortunately, she called me and I explained to her what she had just done — and you could hear the alarms going off in her head. How many people had she called before me? I don’t know.