4 signs you’re not ready to buy a house when it comes to purchasing a home. It’s probably one of the highest-ticket purchases you’ll ever make in life, if not the most high-ticket purchase. You want to, of course, make sure that affordability is number one. This is primary, above all else. However, just because you can afford the house doesn’t necessarily mean that you should.

1. Payment history does not support your ability to qualify for a house. Your credit history does. First, credit payments. For example, if you have rent that you’ve been paying for the last 2 years at $4,500 a month, but you don’t have the income documentation on paper to show that you can afford it, that does not count. So, in this capacity, the first thing is you must be able to show the income. If you can’t show the income, that could be a telltale sign that some remediation might need to take place.
2. Your credit score is too low, say under 600. If your credit score is under 600, you will almost always have to have a down payment of at least 3.5%, sometimes as much as 5 to 10%. The lower the credit score, particularly under 600, the more you’re going to need to have cash for a down payment and/or closing costs. And no, it is not realistic to think you can purchase a house with a down payment assistance program or a special first-time homebuyer program with a sub-600 credit score and have it come to fruition, despite what banks, lenders, and mortgage companies might tell you.
3. Your debts are out of control. If you have car loans, credit cards, and student loan payments that all have high payments, even if the interest rates are super low, that’s going to be problematic because lenders do not look at the interest rate you’re paying on consumer debt. They look at the payment associated with that consumer debt, which is a driver of affordability. Your net income minus your expenses (i.e., housing, food, utilities, plus consumer debts) is what you’re looking at for your bottom line. However, the lender looks at your gross monthly income, and that is what is used to qualify you for the loan. Lenders will use up to a 50% debt ratio, and in some cases, they can go as high as 55%. However, if your debts are too high, your purchasing power diminishes significantly. For example, if you have a $500-a-month car loan, that’s $100,000 less purchasing power on a house. It’s the difference between a $700,000 house and a $600,000 house, for example. In that context, it could be pretty significant. Additionally, if you have car loans that are brand new or recent in the last 12 months, but someone else pays them, these will count against you. You need to have someone else paying the obligation for either a car loan or a student loan, etc., and have 12 months of documentation to show that.
4. You don’t have any cash. Let’s say you want to buy a house, but you need a seller credit for closing costs. And you’ve lost out on several houses because you can’t get your offer accepted due to the price of the house you want in the neighbourhood you want because you need a credit for closing costs. Maybe you don’t need the credit for closing costs, but you want it. There’s a big difference there. Do you have a 401(k) that you can borrow from or a retirement account that you can borrow from? Does your spouse have such an account? Maybe mom or dad has such an account, or your employer could give you a gift. Believe it or not, you can get a gift from your employer. Additionally, these monies can be used to help you buy a home. Recently, the FHA changed their standing, and it now allows you to buy a house, get a gift letter, and show that money going directly to escrow rather than to your bank account. They no longer have to provide a bank statement for FHA loans, which is huge because just a few months ago, donors had to provide a bank statement, which made things more challenging, particularly for people who appreciate their privacy.

Lastly, let’s say that you’re looking to buy a home and your expectations are out of sync with the market. So you say, “Well, I can qualify, but I can’t qualify for what I want, so I’m just going to wait.” Well, that might not be a good strategy. Here’s why: Rent goes up. Rent is a variable payment. Housing prices, over time, always rise. Typically, every 5 to 7 years, if someone buys a house, they’re going to get significant appreciation in that period. So, if you forgo buying a house to keep renting to change your situation, even though your situation may not need to be changed, the bottom line is that the biggest threat is fear. Fear that you’re getting locked down into buying a home, that you’re confined to a certain geographic area, confined to a certain payment, etc. The good news is you can always refinance the house when rates come down, lower your rate and payment, rent out the house if you go into a financial predicament, or sell the property as well.

Looking to buy a house? Get a no-cost quote today!