Consumer Comeback Blog

How to Avoid Buying Your First Home at the Wrong Time

Written by Jeffrey Trull

first-time-homebuyerWhen the time seems right, first-time home-buyers are always eager to go on the house hunt and buy as soon as possible. Armed with the belief that buying a home trumps renting any day, potentially-new homeowners are quick to embrace the benefits of building equity, saving on taxes, and having a place of their own.

But there’s more to home ownership than simply seeking out these advantages that will likely always be available. Look to these factors to avoid buying your first home when the timing isn’t right for you.

Examine the market

If you’re determined to buy a home and get a deal, the timing doesn’t just depend on your life. Market conditions, which fluctuate often and sometimes unpredictably, need to be right. Why’s this important? Because you’ll be susceptible to big swings in home values that could leave your loan underwater if you aren’t careful.

For example, median sale prices of home in the Los Angeles metro area dropped from $585,000 in August 2007 to $358,000 in January 2012. These large declines in the real estate market can drive the value of your house down and make selling difficult and expensive when you owe more on your mortgage than a buyer is willing to pay.

How do you know where the market stands? Look at some of the home price statistics that are available for your specific area area. A great tool to consider is Zillow’s Real Estate Market Reports that includes local data on dozens of metro areas in the U.S. Home prices are still declining in some areas, while others have already started to rebound or never saw as much of a drop at all.

Comparing the cost of renting in your desired city or neighborhood is also helpful to consider. You can use a rent vs buy calculator for cost comparison between each option.

In some cases, home ownership isn’t realistic in every location that you’d hope to rent. For example, according to the New York Times, average rent in Manhattan for July 2012 was $3,500. Compare that to condo prices that often exceed $500,000 and go much, much higher.

Consider whether the market will allow you to buy a home in your location of choice or if renting will make more sense. If you’re set on buying, be prepared consider areas that are less in demand for both renters and buyers, which may eliminate buying in some popular urban locations.

Don’t forget about the lending market, too. Current mortgage interest rates are around 3.50% for a 30-year fixed rate loan, the lowest in history. If you qualify for a low rate, this can have a big impact on making buying a home a good deal.

Look at your savings and credit score

Buying a house largely depends on your credit and income, but you’ll need to have some money up front. Dave Ramsey has some key financial benchmarks to hit before buying, including:

  • Being able to make at least a 10% (preferably a 20%) down payment. While you’re not always required to pay this much down, you’ll have some equity in the house from the start that will lower monthly payments. If you’re able to hit the 20% mark, you’ll avoid private mortgage insurance and save around $1,500 a year on the typical home purchase.
  • Keeping house payments at or below 25% of my monthly take-home pay. Going above this amount may put a strain on your budget and make payment on your loan as well as other living expenses difficult.
  • Being able to afford a 15-year fixed-rate loan. Skipping the 30-year mortgage option will save interest in the long-term and get your loan paid off faster.

Buying a house with excessive debt isn’t recommended, either. Obtaining a mortgage adds a sizable monthly payment to your budget. If you already have an auto loan, student loans, and a credit card debt to pay off, definitely consider getting your debt under control first.

Don’t forget that your credit score matters, too. You’ll need an excellent score of about 720 to get the best rates, and a decent score to be approved for a loan at all. If your credit score isn’t where you want it to be, consider working to improve your score first before applying for a home mortgage.

Consider your lifestyle

Deciding to buy a house isn’t strictly a financial decision. Your lifestyle needs to match up with your plans to own a home.

Owning a home requires more responsibility and upkeep with both time and money than renting does. You’ll be responsible for maintenance both in and outside your home as well as shouldering the costs of any surprise expenses. This means having cash available to pay for emergency fixes should they arise. If you’re already struggling to save for a down payment, home ownership costs might continue to put a strain on your budget.

How long you plan to live in one spot matters, too. Will you plan to stay in your home for at  least 3 to 7 years? This is a rough break even point for where it makes sense financially to buy a house. The time recommendation varies with location and other factors, but you can estimate it again with the rent or buy calculator mentioned earlier. Why this long? It takes time to realize the advantages of tax deductions, building equity, and overcoming costs related to buying and selling a home.

Reasons you might not be ready to stay in one place include relocation due to a job change, attending graduate school, or changes in family life. Consider if you’re likely to move due to any of these or other circumstances, and reassess how that will impact your decision to become a home owner.