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10 reasons you might not be able to buy a house today. But with the right preparation, you could soon be ready.
Wanting to settle down and buy a house is the first step in the home buying process. But, in order to make homeownership a reality, you need to be financially ready. Buying a house involves paying more than just the home's price. We'll go over 10 reasons you might not be able to buy a house today. But with the right preparation, you could soon be ready.
Buying a house is a major expenditure, no matter what part of the country you live in. But some markets are prohibitively expensive for all but the top wage earners. Here is a list of the 10 most expensive cities in the United States in 2015. If you plan to live in one of them, you might not be able to afford to buy a house.
San Francisco, CA - Median home price: $1,085,000
Manhattan, NY - Median home price: $1,059,000
San Jose, CA - Median home price: $700,000
Brooklyn, NY - Median home price: $620,000
Los Angeles, CA - Median home price: $565,000
Seattle, WA - Median home price: $538,500
Washington, D.C. - Median home price: $510,838
San Diego, CA - Median home price: $510,000
Boston, MA - Median home price: $451,250
Queens, NY - Median home price: $369,000
Solution: Consider relocating to a less expensive part of town, such as the suburbs or exurbs. If you can relocate to another area, consider this list of the 10 most affordable cities in the United States in 2015 .
Dayton, OH - Median home price: $119,700
Toledo, OH - Median home price: $119,900
Akron, OH - Median home price: $120,450
Cleveland, OH - Median home price: $129,900
Rochester, NY - Median home price: $137,700
Syracuse, NY - Median home price: $149,900
Wichita, KS - Median home price: $150,000
Little Rock, AR - Median home price: $155,000
Louisville, KY - Median home price: $159,900
Kansas City, MO - Median home price: $164,900 (tie)
Gary, IN - Median home price: $164,900 (tie)
When you want to buy a house, you need to find out how much mortgage you can afford. You can use the mortgage calculator right here on our site. All you need to do is type in your gross monthly income, and hit enter to find out how much your maximum affordable mortgage is. For example, if your gross monthly income (what you make before taxes and other deductions) were $5,000, you could afford a mortgage payment of $1,800, assuming you have no debt. If your gross income were $4,000, for example, then you could not afford a house with mortgage payments of $1,800 a month; you could afford to pay only $1,440.
Solution: Wait to buy until you get a pay raise, or look for a lower-priced home.
You might make enough money to afford a mortgage payment of $1,800, but if you carry a lot of debt, you might not be able to afford to pay the mortgage and the debt. You can use our mortgage calculator to figure this out. Let's say your gross monthly income is $5,000, but you have a car payment of $300 a month, a minimum credit card payment of $25 a month, and a student loan payment of $100 a month. In this case, instead of being able to afford a mortgage payment of $1,800 a month, you could afford to pay only $1,375 (assuming a DTI of 36 percent - more on this later).
Solution: Wait to buy until you pay off some or all your debts.
Whenever you buy a house, you need to put some money down - the down payment. If you can pay 20 percent of the home's price, you won't need to pay private mortgage insurance (PMI), insurance lenders charge to help protect them in case you default on the loan. But if you don't have 20 percent saved up, you can still get a loan by putting down as little as 5 percent. Or if you take out a Federal Housing Administration (FHA) loan, you might be able to pay as little as 3.5 percent for a down payment. On a $300,000 house, 3.5 percent would be $10,500, and 20 percent would be $60,000. You'll also need to pay closing costs, which are usually somewhere between 2 percent and 5 percent of the home's price. Sometimes you can get the seller to pay closing costs, but you can't count on that.
Solution: Open a saving account, and start putting a certain percentage of each paycheck into it.
Lenders look at your debt-to-income ratio (DTI) to determine whether you'll get a mortgage. They determine this number by adding your monthly debts and dividing that number by your gross monthly income. The lower this number is the better. The highest your DTI can usually be to get a loan is 43 percent; although, some lenders set the bar at no more than 36 percent. If your debts, including your mortgage payment, total $2,225 a month, for example, and your gross monthly income were $5,000, your DTI would be 45 percent, which would be too high.
Solution: Find a less expensive house, pay off some debt, or wait until you get a raise before buying a house.
No matter whether you get a fixed-rate mortgage or an adjustable-rate mortgage, you'll need to pay interest. The higher the interest rate the more your monthly payments will be. Interest rates vary based on many factors. As of 2016, interest rates remain historically low, so it would be a good time to borrow money. But just because interest rates are low doesn't mean you qualify for the best rate. That depends largely on your credit score. The higher your credit score, the lower your interest rate, and the lower your credit score the higher your interest rate will be (if you qualify at all). Lenders generally prefer your score to be 620 or above to qualify for a loan. The FHA goes as low as 580.
Solution: Wait to buy a house until you raise your credit score. The best ways to do that would be to start paying all your bills on time and to lower your debt load.
Property taxes vary based on where you live. To give you an example of just how much they can vary, Hawaii has the lowest property taxes in the nation of 0.28 percent. Compare that with New Jersey, the state with the highest property taxes, at 2.29 percent. Annual property taxes are typically divided by 12 and become part of your mortgage payment. They go into an escrow account, which your lender pays at tax time. Depending on how much the taxes are in your area, they might make your mortgage payment too high to be affordable for you.
Solution: Most people don't relocate based on property taxes alone, but some do. Another solution is to find a less expensive home.
If you take out a mortgage to buy a house, you'll be required by your lender to carry homeowners insurance. This covers incidents that could happen to your home, such as needing to repair or replace a leaky roof, to reimburse you from theft of your belongings, or to pay for weather-related damage. How much homeowners insurance costs varies based on many factors, such as your local crime rate, your proximity to a fire station, the coverage and deductible you choose, and the insurance company you pick. Annual premiums can be divided by 12 and added to your mortgage payment, just as property taxes are. If your insurance is too high, your mortgage payments might become unaffordable.
Solution: Shop around for the best deal on homeowners insurance.
Private mortgage insurance (PMI) is a cost that is added to your mortgage payment if you have less than 20 percent equity in the home. It adds anywhere from 0.3 percent to 1.5 percent of the loan amount per year. This cost is divided by 12 and added to your monthly mortgage payment. This expense could make your mortgage payment too high.
Solution: Wait to buy until you have the 20 percent needed for a down payment to avoid PMI.
If you're buying a condo, townhouse, or single-family home in a subdivision, make sure you find out what the homeowners association (HOA) dues are. These dues can vary greatly, depending on the community. Sometimes, they can be so high as to make the property you want to buy unaffordable.
Solution: Look at whether there are HOA fees and what they are as part of the process for deciding which home to buy.
Now that you know and understand all the costs associated with buying a house, you can rest assured that you're not rushing into the process, making it more likely for you to become delinquent on your loan. The more prepared you are, the more likely it will be that your home purchase will be the right one.
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