Owning a home can be cheaper than renting in many parts of the country, and there a many long-term financial benefits and other perks. However, owning a home isn't for everyone. Here are five signs you aren't ready to buy your first house -- yet.
You don't want to worry about maintenance, repairs, and other uncertain costs
When you rent a home, the rent payment tends to increase steadily over time, but this is the only uncertain cost you have to worry about.
When you own a home, you have to do your own maintenance, or pay someone else to do it for you. You'll have to cut your own grass, fix your own toilets, paint the outside of the house, etc. Plus, there are the big-ticket items that need to be replaced every once in a while.
As a general rule, many experts suggest that you set aside 1% of the home's value each year to cover maintenance expenses, but this can vary considerably.
In addition, homeowners have to deal with property taxes, homeowners' insurance, and HOA fees. These costs tend to change over time, and usually not in the homeowner's favor. While it's true that a fixed-rate mortgage payment will remain constant for the duration of the loan, the other costs of homeownership will not, so make sure you're fully aware of this before you buy.
You don't have a large down payment
To be fair, it's certainly possible to buy a home without a big down payment. You can obtain an FHA mortgage with 3.5% down, and conventional financing is even available with as little as 3% down. If you qualify for a VA loan or have excellent credit, it can be possible to buy a home with no money upfront whatsoever.
However, just because you can do something doesn't mean that you should. Buying a home with little or no money down affects you in two possible ways.
First, most mortgages (with the main exception of VA loans) require mortgage insurance with a down payment of less than 20%. The price of mortgage insurance can vary depending on several factors, but it can cost in the ballpark of 1% of your loan amount each year. So, on a $300,000 conventional mortgage with a 3% down payment, plan on an additional $3,000 per year for mortgage insurance until your loan-to-value ratio reaches 80%.
Second, the more obvious effect of putting less money down is that you'll end up borrowing more, which results in a higher principal and interest payment each month, in addition to any mortgage insurance cost.
You don't know what your life will be like in a few years
One of the best reasons not to buy a home is if you're unsure about where you'll be in a few years. Maybe your job isn't stable. Maybe you're single, and there's a possibility that you'll get married and have children in a few years. Or, maybe you just like a change of scenery every so often.
Buying a home is generally not worth it unless you're going to be there for at least five years.
You have shaky credit
Similarly to the down payment discussion earlier, you can buy a home with less than perfect credit, but that doesn't make it a good idea. The traditional go-to option for shaky credit is an FHA loan, but these have high mortgage premiums -- both upfront and ongoing -- that you can't drop for the entire life of the loan.
If your FICO score is greater than 620, you should be able to get a conventional mortgage, but your interest rate isn't likely to be great. If your credit is bad, you're probably better off waiting and working on improving your score.
Your other debt is too high
When determining how much of a mortgage you can qualify for, lenders take two main pieces of information into consideration -- your income and your other debts.
Most lenders these days limit your mortgage payment plus your other debt obligations to 45% of your total income, and that's only if your credit and employment situation is good. Traditionally, the maximum debt-to-income ratio lenders like to see is 36%. Well, if your other debts eat up, say, one third of what you make, this doesn't leave much to pay a mortgage.
And, unless you live in a high-cost area, 45% of your income is a lot to commit to debt repayment. Maxing out your budget is rarely a good idea, as it leaves little discretionary income to pay for other things and to save and invest.
Buy or rent? It's not that simple
Homeownership is not for everyone. If now isn't the right time, don't rush it.