It’s super exciting to buy a home. You don’t need to ask permission to paint the walls, have a vegetable garden, or adopt a pet (or two). You also don’t need to deal with annual rent increases. But just because you’ve had a steady job for the past two years (or more) and could likely qualify for a mortgage doesn’t mean you’re ready to buy. You have other considerations before you take the plunge to homeownership.
Here are three reasons you should wait to buy a house.
1. You have too much debt
You might make a decent income, but you also must consider how much debt you carry before you apply for a home loan. Your lender will. They use a calculation called debt-to-income ratio (DTI). To qualify for most mortgage loans, you need a DTI of 43 percent or less.
You can figure what yours is by writing down all your debts, such as a student loan, car loan, your minimum credit card payment, and any other debt. Total that. Then figure out how much income you bring in. You figure your gross income, and add investment or bonus income. Divide your debt by your income. The lower your DTI the better. If it’s high, you’ll need to pay off some debt before you buy a home.
2. You’re not sure you’ll settle here
Once you buy a house, you can’t just pick up and move if you were to get a promotion or (surprise!) have a baby who needs more room. Well, you could, but you’ll lose a lot of money. All those closing costs and the new furniture and blinds that perfectly fit the house will be money you needlessly spent.
Plus, your mortgage payments go mostly toward interest in the early years. It takes a few years to start making a dent in the principle. You might not be able to sell the house right away, either, meaning you might have to drop the price, selling it for less than it’s worth.
And don’t forget the real estate agent’s commission of between 4 percent and 6 percent that you’ll need to pay when you sell. A good rule of thumb for buying a house is that you should stay in it for at least five years. Otherwise, you’re probably better off renting.
3. You don’t have a large down payment saved
You could buy a house with less than 20 percent saved for a down payment. But ask yourself whether you should. If you put down less than that, you’ll need to pay mortgage insurance to the lender. They charge you when you have less than 20 percent invested in the home in case you default.
If you get a private loan, expect to pay between 0.3 percent and 1.5 percent for private mortgage insurance (PMI). If you get a Federal Housing Administration loan, you’ll also pay mortgage insurance, no matter how much of a down payment you make.
You’ll pay an upfront premium of 1.75 percent of the loan amount and then an annual premium between 0.45 percent and 0.85 percent of the loan. The only way to stop paying mortgage insurance on an FHA loan is to refinance to a private loan once you have 20 percent equity in the home.