Wednesday, February 6, 2008

Don't Buy a Home?

Don't Buy a Home.

What? Are you kidding?

As a Realtor®, my job is to help people to buy or sell their real estate. When someone wants to hire me to solve their real estate needs, I am very gratified.

But, sometimes it’s better for my client to NOT buy (or sell) a home. How so?

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 owning a house than the change it brings about in your lifestyle.

As a Realtor®, I want you to be ecstatic when buying a home. With an approach like that, it means that 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, 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.

Generally, if you have to sell a home within five years of buying, you’ll be lucky to get away at a break-even. I’ve had clients having to bring funds to the closing when they sell, rather than walking away with a check for their proceeds.

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 be of good cheer! 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 ecstatic 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, 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.

4. The only way you can afford the house is using a “creative” 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 are designed to 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 (at least) some reserves after your downpayment 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.

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