Every week, you hear about the hot real estate market. You hear about people selling their homes for more than list price. You read about people who can’t find another house to buy, who keep losing houses to other people in bidding wars. You read about homes going up 10, 20, even 50 percent in value in a single year.
And you wonder if you should continue to rent, or if you should finally try and buy something.
You’re not alone. Well over 2 million home buyers will take the plunge for the first time this year. They, too, wonder if they’re making the right decision.
Wendy and Karl are professionals who work and live in Los Angeles. They have the income to support the purchase of a first home in southern California, virtually no debt, and they need the space. And yet, when they finally found something that met just about all of the items on their reality check, plus a few on their wish list, they hesitated — and three other offers came in on the property.
There are some folks who should rent rather than buy. And there are solid financial and emotional reasons for doing so.
On the financial side, if you have bad credit, can’t afford the mortgage and upkeep of a home, and if you’re not sure you’re going to be employed at the same company throughout the application process (through the closing), then you should probably hold off on buying for awhile. And, of course, if you live in an area where you can rent a house more cheaply than owning one, or if homes aren’t appreciating there for one reason or another, renting may be the right choice.
Credit problems alone can sink you. Mortgage lenders want to see that you pay your bills on time each month. They want to see that you’re responsible with the credit you’ve been extended. If you’re late paying bills each month, if you sometimes don’t send in a credit card payment, it doesn’t look good.
Also, lenders like to see stability. They want you to have been at your current job for at least one year and preferably two. If you’re self-employed, they’ll take a harder look at your tax statements, and business profit and loss for the past two or three years. While lenders are more flexible than before about job jumping, they could cancel your mortgage approval if you change jobs or lose your job just before closing.
But for many first-time buyers, not buying a house isn’t about your money. It’s about your feelings. And again, there are perfectly legitimate emotional reasons to rent — even if it would be cheaper for you to own your own home — including:
Not knowing where you want to live. Neighborhoods and communities are vital to homeownership. If you haven’t picked the right spot, find a home to rent in a neighborhood you think you might like and test it out for 6 months or a year.
The corporate transfer. If you’re going to move in three years or less, it rarely makes sense (emotionally or financially) to buy a home unless your company will pick up your closing and moving expenses or buy your house from you.
Fear of income failure. Getting locked into mortgage payments frightens some people. They’re afraid they won’t earn enough money to pay the mortgage and have enough to eat. While this is rarely true (in fact, some people spend 70 percent of their take home pay on their rent and still manage to feed and clothe their family), fear can sink a first-time buyer trial balloon.
Tremendous debt. If you’re just paying off thousands of dollars in credit card debt, school and auto loans, you’ll finally feel the debt albatross loosen from around your neck. You may not want the emotional ties of a mortgage until you’ve been debt free for awhile.
Outsized expectations. If you’ve fallen in love with a house or neighborhood you can’t afford, or need a larger home than you can afford, then it will be difficult to resize your expectations so that they are more in line with your wallet.
The risks of homeownership. Like any financial investment, buying a home isn’t a sure thing. And as the financial experts say, “past performance is no guarantee of future results.” In other words, just because your neighborhood jumped 50 percent in value in 5 years doesn’t mean that it will do so this year — or ever again. Likewise if you choose an adjustable rate mortgage (ARM) instead of a fixed-rate mortgage, the interest rate will undoubtedly rise. That knowledge alone may send you shivering in fear. And if it does, you should either rethink your mortgage plans, or continue renting.
Fear of commitment. It’s very difficult to say “I do,” whether you’re getting married or deciding to make the biggest financial decision of your entire life. It’s okay to be scared about buying your first home. Give yourself time to get used to the idea. That way, you’ll make the right choice, not bid on reflex.
Wendy and Karl finally got up the nerve to make an offer. They didn’t get the first home they bid on, but they were able to dispel some of the mystique that surrounds the bidding process. And, like many first-time buyers who lose a home, they will surely jump faster the next time they see a home that meets all of their needs, and some of their wants.