own vs. rent
Let's face it, you're tired of moving. What's the point anyway? The rent is always too damn high, and it gets worse with every new lease you sign. And even if you do find a great place, it simply isn't your own to do with as you wish. Then there's the inescapably frustrating fact: You're helping pay your landlord's mortgage and not your own. Maybe you're just ready for your own house.
But are you ready for a mortgage?
Even if you've been paying rent like a champ for years, taking on a mortgage is a whole different beast. Here are some warning signs that you should probably keep renting -- at least for a while.
1. You recently switched jobs
If you've just started a new job, switched career paths, or been working sporadically for a while now, your employment history might set off some very loud warning bells with any potential lender.
"Lenders prefer to see that a home buyer has two years of stable employment in the same industry -- unless the home buyer is just out of college, which carries special circumstances," says Ginger Wilcox, chief industry officer at the mortgage marketplace Sindeo.
2. You're still building your savings
Saving for a down payment is tough. Nowadays you may not have to put down 20% of the home purchase price. But you'll still pay private mortgage insurance. And while you may be eligible for down payment assistance, you'll need to show you've got some savings in the bank -- and then some.
If you're emptying your bank account to make a down payment, you can be sure lenders are going to raise an eyebrow. And who can blame them?
"They like to see savings, as nothing or little saved provides no cushion in the event of an emergency," Wilcox says.
3. Your bills are high
If you're carrying a boatload of credit card debt, paying off a personal loan, or still trying to work down those pesky Tesla payments, you may very well have trouble qualifying for a decent home loan. Lenders look at your debt-to-income ratio when deciding whether to approve your loan and how much you qualify for -- and trust us, everything adds up.
Say, for example, each month you have a $400 car payment and $250 student loan payment, and you pay $100 toward credit card debt. If you're looking at a $1,500 monthly mortgage payment on top of all that, your monthly debt is sitting at $2,250. So if you're banking $4,500 a month, your debt-to-income ratio is 50%.
In fact, having a high debt-to-income ratio may knock you out of the running for a mortgage altogether. The highest debt-to-income ratio you can have for a qualified mortgage is 43%, according to the Consumer Financial Protection Bureau.
4. Your credit isn't stellar
The credit scores you see online will be a bit different from what lenders sees (they use their own credit scoring system), but they will give you a good idea of where you're at. Reality No. 1: You don't need a perfect 850 to get a mortgage. Reality No. 2: The higher your score, the better off you are.
Still, different loan programs and lenders will take lower credit scores -- as low as 580 to qualify for an FHA loan and 640 to qualify for conventional.
"The most powerful way consumers can boost their credit score is to improve how they use their credit cards," Wilcox says. That means the following:
- Pay down your credit card debt
- Pay all your bills on time
- Keep your oldest accounts open and in good standing
- Don't take on new debt
Plan on working that program for several months to see a significant boost.
5. The timing just isn't right
Wanting a house is one thing -- a great thing, in fact! But being ready for a house is another. Even if you're financially ready, there may be things in your life that need sorting first.
"Not only do home buyers have to look for whether or not they can qualify for a loan, they need to look at other areas of their personal and financial life to determine if buying now is the right decision for them," Wilcox says. "If making mortgage payments is going to take away a lifestyle they enjoy, cause too much stress to stay in a job they hate, or further stress an unstable relationship with a co-signee, perhaps it is better to come up with a homeownership strategy now to find the balance in the future."
Before you start hitting up lenders, ask yourself if a mortgage is going to change your life for the better. Because, after all, that's the whole idea.
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