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Should I Buy a House Now or Wait? – 6 Factors to Consider

By Christy Rakoczy

family buy houseOwning a home has long been considered to be part of the American Dream, but as the huge tidal wave of foreclosures has taught us in recent years, it can also be a major disaster if you buy a house you cannot afford – or if you buy a home before you are ready for home ownership.

Purchasing a home is a major investment, and as with any investment, it is important to be educated before you dive in. Once you have a basic understanding of what home ownership entails, you must carefully consider whether you are truly ready to buy.

When determining whether you are ready to buy your first house, there are six key factors to consider.

Am I Ready to Buy a House?

1. The Current State of Your Finances

The current state of your finances is perhaps the single most important factor to consider when determining whether you are ready to delve into home ownership. When examining your current financial state, you must answer two questions:

  • Do I Have Cash Set Aside for a Down Payment? Ideally, you need to be able to put down at least 20% of the cost of the home to avoid having to pay private mortgage insurance (PMI). PMI is a huge waste of money, since it essentially just protects the bank’s investment in case you default on the loan. Buying a house without a down payment is risky for the bank and for you, since you could end up owing more than the home is worth if property values fall. PMI protects the bank, but you won’t have a safety net if you haven’t put money down on the home.
  • Can I Afford the Cost of a Mortgage? This question seems obvious, but it is important to think about future mortgage payments, as well as current payments. If you take a fixed-rate mortgage, your payments will not change over the life of the loan, and it will be easier to predict whether you will be able to afford future payments. However, if you take an adjustable rate mortgage, you may be able to afford the payments now, but not when they adjust upward in the future. This is a significant risk, and these types of adjustable rate mortgages have been a major contributing factor in the ongoing mortgage crisis in the U.S.

So, why have people taken adjustable rate mortgages? Usually it is because their initial interest rate was lower – making it seem like they could afford the mortgage when they really could not. Don’t fall into this trap. If you need some type of creative financing to afford your house, then you simply can’t afford it.

mortgages can be costly

2. The Stability of  Your Financial Future

This is another important factor when determining whether you should buy a house now or wait until the future. If you have recently changed jobs, if you are thinking about changing jobs, or if you are expecting any major changes to your income, it is not a good idea to buy a house until you are on more solid footing. Banks and mortgage lenders typically require you to have been with your employer for at least a year or two before they will consider you for a loan.

Furthermore, you need to have a plan to pay your mortgage in the event that something does go wrong in the future, such as a layoff or a medical problem. Typically, this means you should have an emergency fund – at least a few months’ worth of living expenses – set aside before you buy a home.

An emergency fund can also come in handy to help you to bear all of the unexpected costs that come along with being a homeowner. For instance, having cash set aside for repairs is essential, since you will not have a landlord to call when something goes wrong.

3. Your Credit Score

The state of your credit is just as important as the state of your finances when it comes to deciding whether you are ready to buy a home. Your credit score determines whether a mortgage lender will give you a loan at all, as well as the rate. A low credit score can result in a significantly higher interest rate, which means that you will pay thousands (or hundreds of thousands) more over the life of the loan.

Typically, you need a credit score above 720 in order to get the most advantageous rates. If your score is lower, consider waiting a while to buy a house as you try to improve it. You can do this by:

  • Paying down debt
  • Having inaccuracies removed from your credit report
  • Making payments on time every month
  • Avoiding opening new types of credit or applying for new loans

Over time, with responsible borrowing behavior, old negatives on your report will have less of an impact, your score will go up, and you will be ready to purchase a home at a better rate.

4. Your Commitment to Staying in One Place

Buying a house entails a large initial expense. First, you must pay the closing costs associated with your mortgage, which can total several thousand dollars. Once you are in the home, most of the initial mortgage payments go toward paying interest on the loan, rather than paying down the loan balance. Keep in mind too that selling your home in the future may also be expensive, as you typically must pay commission to a real estate agent.

With all of these costs, it is very difficult – if not impossible – to make money on a home unless you plan to stay in it for a while. Until recently, many experts recommended that you plan to stay put for at least two years if you are going to buy a home. However, because of an uncertain real estate market and uncertain property values, this estimate has been revised to suggest that you refrain from buying unless you plan to stay put for at least three to five years. If you aren’t committed to staying in one place for that duration, now is not the time to buy.

5. The Current Real Estate and Credit Market

While this factor may not be as crucial as the other considerations, you still need to consider it. Look at the current interest rates, and consider the experts’ opinions as to whether property values are on the rise, or are likely to fall.

  • If interest rates are at record lows, it may be a good time to buy, as you will pay a reduced cost for the privilege of borrowing money.
  • If property values are on the decline, it may be a good time to wait as you could end up getting a better deal on the same type of home in just a few months’ time.

It can be very hard to accurately predict what interest rates or property values will do, so these shouldn’t be deciding factors – but they are worth considering.

is now the right time to buy?

6. Your Commitment to Home Ownership

Being a homeowner is different than being a renter. You need to take care of all of your own home repairs and maintenance, rather than counting on someone else to do it. You may have more yard work, as well as additional responsibilities (such as shoveling snow and cleaning out gutters) that renters don’t have to worry about. While some people don’t mind such chores, others don’t want the hassle. Consider whether you are ready to take on these added responsibilities of home ownership before you make your decision.

Final Word

All of these factors need to be weighed and considered when deciding if now is the right time to buy a home. Make sure everyone in your family is on board and that you think with your head, not your heart. If you don’t carefully consider every aspect of this important financial decision, you could find yourself struggling to make mortgage payments you can barely afford – or worse, you could find yourself in foreclosure.

What are some other factors to consider before buying a house?

(photo credit: Bigstock)

Christy Rakoczy
Christy Rakoczy earned her undergraduate degree from the University of Rochester and her Juris Doctorate from UCLA School of Law. She is currently a full-time writer who writes both textbooks and web content related to personal finance and the law. She and her husband and two dogs split their time between Florida and Pennsylvania.

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  • http://www.ohiomortgagesolutions.com/ T.C. Strait

    For Fannie Mae and Freddie Mac (Conventional loans) the gold standard for credit scores is 740. Also, one thing that people forget to include in their decision making process is the cost of maintenance on the new home. Hot water heater goes out, plumbing problems, new roof, etc, etc. Got to plan for emergencies.

  • http://www.debt-tips.com/ Kris

    If you have the money and the timing is right, why not? The market is good for buyers, and interest rates are low, so you might get a great deal.

  • http://tiethemoneyknot.com/ Tie the Money Knot

    This seems like a decent time to buy in some places, based on the combination of prices coming back down to earth, and super low rates. Of course, I still think that there will be room for prices to drop more in some places.

    Having said that, regardless of market conditions, I think it’s important for people to focus on needs vs. wants, and not let emotion get in the way of a purchase. In that regard, it’s not so much “show I buy a house now”, but “WHAT KIND of house should I buy now”. That latter question is, I believe, what trips up a lot of people. They buy on want vs. need, and based on how much the could afford if they “stretch”, as opposed to what they could truly comfortably afford.

  • http://www.sailmortgage.com/mortgage-your-house-not-your-future/ Pittsburgh Mortgage

    I’d say the biggest factor right now is whether or not you can afford a big down payment and get signed onto a fixed-rate mortgage. Rates are at record lows, so if a house is what you REALLY want – why wouldn’t you buy? I’d say it’s only a bad choice for people who would only be able to afford an ARM, since rates are only likely to increase in the near future.
    Well, I’d also advise against buying a home for its own sake. Some people just don’t really want to buy, but they get pressured into homeowning because it’s what they’re “supposed” to do.

  • http://www.manhattansgreatest.blogspot.com/ Dennis The Menace

    Its as good a time as any to buy a home interest rates on home loans are under 4% you cannot beat that.

    • Malaysia Jill

      I’m going to buy, but only when I’ve saved up enough to pay in full, in cash.

      While waiting for that, I will make smart decisions with my money:

      1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.

      2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($26/month from 4AutoInsuranceQuote… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.

      3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.

      4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.

      5) I need life insurance to protect my daughter, but I ditched a $275 a month whole life policy for a policy and now I only spend $25 a month. I save the difference to my Roth IRA.

      6) The most important one – make as much as I can. Save as much as I can.

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