I am a big believer in home ownership, but only if it makes financial sense. If you answer yes to any of these questions you are better off renting:
Is there any chance you would want to move within five or so years? It costs a lot of money to sell a home, starting with the typical 6% commission you will owe your real estate agent. Then there are moving costs and transfer fees in some areas. Add it all up and I think it’s smart to expect you will use around 10% of the sale price just to cover all your sales-related expenses. The sooner you sell the less likely you will have built up enough equity to cover those costs.
Is your credit score below 740? A FICO credit score of at least 740 is going to put you in the position to land the best loan deal. Anything below that and I would recommend taking the time to get your score higher before you shop for a house. Qualifying for a mortgage that is just an eighth or a quarter point lower because of a solid credit score can save you tens of thousands of dollars in interest costs over the life of a loan.
Do you have less than eight months of living expenses set aside in an emergency fund? I know that’s a high bar. For a reason: your peace of mind. Until you have this safety cushion in place I don’t want you taking on any big financial obligations. And it gets no bigger than a mortgage.
Will you be making a down payment of less than 20%? Yes, I am well aware lenders will be happy to give you a mortgage with a down payment of as little as 3% or so. Don’t fall for it. When you make a low down payment you often will be hit with a higher interest rate. And any mortgage (other than a VA-backed loan) that is for more than 80% of the purchase price will require that you have private mortgage insurance. The bottom line is that low down payment mortgages end up costing you a lot. And most important, I think saving up for a down payment is an important step: it requires patience and resolve. And the ability to save! That’s just the sort of person who gets my approval to buy a home.