Summary: Are you considering a home purchase, but don’t know if it’s the best financial decision for you? Avoid the common pitfalls and understand 7 signs you’re not ready to buy a home in Washington State. Read this fact-filled article and get your journey to home-ownership started off on the right foot.
Are you considering a home purchase, and wondering if it’s the right time for you to buy? Here are 7 signs you’re not ready to buy a home in Washington state. You may have heard folks talking about the benefits of home-ownership. Maybe you are anxious to join the ranks. However, if any of these signs sound familiar, you may want to wait before you buy a home in Washington State.
Owning a home is a huge financial responsibility, and if you are looking to purchase you need to think about whether or not you are truly up to the task. Often times, a mortgage is the largest amount of money you will ever finance. Furthermore, owning a home means extra costs like homeowners insurance, real estate taxes, home maintenance, and repairs.
There are several signs that signal someone may not be in the best position to buy a home. Identifying your current financial situation and fixing any potential problem areas ahead of time will help ensure that you are in a good position to take on the responsibility of homeownership.
Let’s take a look at 7 signs you’re not ready to buy a home in Washington state.
- You Don’t Make Enough Money
- You Haven’t Been Employed Long Enough
- Low Credit Score
- To Much Debt
- Not Enough Savings
- You Think Your Purchasing As An Investment
- Location is Not Determined
#1. You Don’t Make Enough Money
Let’s cut to the chase, it may seem like you make enough money to purchase a home. However, there are a lot of costs associated with homeownership that you may not expect. You not only need money to cover the monthly payment, but you also need money for a down payment and you should have significant savings to support unplanned eventualities. One thing you don’t want to do is figure out you don’t make enough after you have already made a home purchase. Don’t take anything for granted, Sit down and crunch the numbers. Talk to a trusted mortgage professional and really get down to the dollars and cents.
#2. You Haven’t Been Employed Long Enough
Here’s another “top line” item on the readiness checklist. Congratulations, you finally have a job that provides a decent paycheck. Slow down, that doesn’t necessarily mean you are ready to buy a home yet. If you just started the job within the last several months, it’s probably a good idea to wait a little while to make sure your job will be a good fit. You don’t want to make big purchase decisions only to find your paycheck isn’t as secure as you thought.
#3. Low Credit Score
You may not be rich, but before making the decision to purchase a home, it’s a wise idea to make sure you have a good credit score. Read this article for resources you can use to check your credit score for free. Just because you may be able to purchase a home with a low credit score doesn’t mean you should. Here’s a quick snapshot of credit scores and how they translate to potential creditors.
- 750 and above – Excellent Credit
- 700 – Good Credit
- 650 – Fair Credit
- 600 – Poor Credit
Not only will you have a difficult time finding a good rate with poor credit but bad it can prevent you from qualifying for a mortgage at all. If you have a credit score of 620 or lower, you may still be able to find lending resources. However, the fees and interest rates will likely cost you thousands over the life of the loan.
Higher interest rates mean higher mortgage payments. If your credit is on the fringe, it may be good to hold off and take some time before purchasing. Use the time to understand and improve your FICO credit score and properly prepare for a home purchase.
Your FICO credit score ranges between 300 and 850. Your FICO credit score is based on many things but the company is open about 5 major components. Let’s take a look:
Makes up about 35% of your credit score. FICO considers past payment behavior as a strong indicator of future expectations. The best way to ensure a good score here is to commit to making regular timely payments on all of your revolving credit balances.
Credit utilization simply refers to the amount of credit you are using in ratio to the amount you have available. The best way to maintain a good score here is to maintain low or no balance on any of your credit cards.
Length of Credit History
If you have no credit history, you can’t have “perfect credit”. The length of credit history refers to the amount of time each credit account has been open. It makes up about 10% of your overall score and also takes into account how long it has been since action on any open accounts. For new borrowers here, the name of the game is to establish and maintain a good history with creditors. For long term borrowers, maintain those long-standing accounts and commit to regular timely payments.
A subset of credit history length, new credit refers to how many new credit accounts you have and makes up about 10% of your overall score. The recommendation here is to only open new credit when it’s needed. Don’t open multiple credit lines in order to establish a history.
Credit Mix refers to the different kinds of credit accounts you may have and makes up about 10% of your overall score. Different types of credit accounts may include student, and auto loans, credit cards, and mortgages.
#4. Too Much Debt
One of the 7 signs you’re not ready to buy a home in Washington State is too much personal debt. An existing mortgage is an additional (albeit different) form of debt. If you already have a large amount of debt, you might not be able to handle an additional loan. A classic investment rule tells us to never let housing costs exceed 30% of your income. That includes mortgage payments, taxes, insurance, upkeep, etc.
There are different kinds of debt; Some forms of debt that people might have include student loans, credit card debt, and car loans. Cutting down or eliminating some of this debt before applying for a mortgage will make you more competitive when applying for a mortgage. Here’s a look at two different types of debt.
Unsecured debt is any debt that has no collateral associated with it. It is obtained on the lender’s “good faith” in your ability to pay it back. Because lenders have no guarantee of repayment, unsecured debt usually comes with a higher interest rate. Some examples of unsecured debt include credit cards, medical bills, membership contracts, or signature loans.
Revolving debt refers to any credit agreement where the consumer can borrow up to a certain amount on a recurring basis. Lines of credit or credit cards are a good example of unsecured revolving debt. However, a home equity line of credit is an example of secured revolving debt.
Take the time to understand your existing credit and how it may affect your borrowing potential.
#5. Not Enough Savings
In addition to the ongoing necessity of debt reduction and management, building substantial personal savings is essential. The first savings factor that many people consider is the need to have enough money for the down payment. It is highly unlikely that a lender will hand out a loan to someone who is not able (or willing) to put up any personal capital. Another less understood savings factor is the need for “lender required cash reserves”.
This one may surprise you as it doesn’t fit into the category of direct closing costs. Most lenders require that you have a cash reserve or “x” amount of savings after the home is purchased and all other closing expenses have been paid. Lenders enact this policy in order to avoid buyers falling into a precarious financial situation after purchasing. In other words, the lender wants to make sure you have enough money set aside to make the mortgage payments.
So, How much should you have set aside? A common cash reserve requirement is 2 months worth. This means having enough in savings to cover two months of mortgage payments. As an example, if your total mortgage payment including principal, interest, taxes, and insurance is 2,000 dollars a month, the cash reserve requirement would be 4,000 dollars.
In addition to cash reserve requirements, maintaining personal savings is essential to cover potential home maintenance, repairs, personal emergencies or unexpected eventualities. So, how much is a good amount to have in your personal savings?
Most financial planners will tell you you should sock away enough cash to cover 6 to 8 months of expenses. This means If you need $4,000 per month to get by, your savings goal should be 24 to 36,000 dollars. Why so much? Experts say 6 to 8 months is about how long it takes the average person to find another job. Having extra savings set aside brings a degree of protection should you need to secure employment in the future.
#6. You Think You Are Purchasing As An Investment
Let’s get real. If you think you want to purchase a single-family home as your primary residence, and you think you are doing it as an investment you may want to take a pause. Just because a home’s value appreciates, does not make it an investment. True, real estate values have risen historically, and you only make mortgage payments for a fixed amount of time. However, when you factor in additional costs such as taxes, upkeep, and maintenance, it’s easy to see that your primary residence eats a lot of the equity it gains over time.
#7. Location Is Not Determined
Another sign you’re not ready to buy a home in Washington State is if you don’t know you will be staying in Washington State long term. People move from place to place. It is a reality of school, employment, relationships, and more. At the same time, it is hard for someone to buy a house if they don’t know where they want to live.
Purchasing a home is a big decision with long term consequences and while it might seem obvious, it’s a factor that is frequently overlooked. Think about where “home” is going to be before deciding to buy. Consider the overall cost of living in that location, possible homeowner associations, the potential commute and think about your personal future plans. If you aren’t ready to “settle down” you may not be ready to buy a home.
Have Questions or Need a Mortgage Loan?
Understand these 7 signs you’re not ready to buy a home in Washington State and don’t take the process lightly. Consider the implications and whether or not you are truly ready to buy a home before applying for a mortgage. Talk with a trusted home mortgage professional to discuss your options and create a responsible path to home-ownership.
Although it takes some time and planning, buying a home is absolutely possible for everyone.
If you are wondering whether its the right time for you to buy, refinance, or maybe you just have questions about home-ownership, consult your trusted home mortgage expert at Sammamish Mortgage today. Let the professionals at Sammamish Mortgage guide you. Family owned and operated for more than 25 years, we know what you value. Let us help you understand the ins and outs of home financing and more. Sammamish Mortgage offers a variety of loan programs including FHA and VA mortgages. Regardless of your situation, we can guide you through the process. Proudly serving Washington State, Oregon, Idaho, and Colorado. Please contact one of our friendly staff members today. We look forward to serving you.