Use Caution When Buying a Home

Don't rush into buying a home without being sure you are ready and that you are doing it for the right reasons

Buying a house has become the American Dream. When people purchase their first home, they feel as though they have arrived. Unfortunately, the quest for home ownership can be an unhealthy financial goal.

The mortgage and real estate industries are big money sectors of the economy. These industries make money when people buy and sell property and, thus, close loans. The mortgage sector has a lot of incentive to qualify people for loans and have come up with very creative ways to do so.

There are some things you may want to consider before you jump into a mortgage that is bad for you financially.

Purchasing a home is not for everybody

There are some definite situations where people should forego purchasing a home. People that fall into these categories should consider delaying the purchase of a home in the short-term or maybe even forever.

Bad credit

A mortgage broker can close a loan for a person with bad credit. Such loans, however, come with a cost. People with bad credit qualify for subprime mortgages. Rates on these mortgages are much higher than they are on conventional mortgages. Higher rates mean higher monthly payments. There is nothing worse for a person who has already struggled to pay their bills than to have a mortgage that is too much for them to pay.

What is even worse is that some lenders don't even report your good payment history on a subprime mortgage to the credit bureaus. In other words, you qualify for a loan with a high rate because you have bad credit, but still make the payments on time. Normally, this would help your credit and you would be able to refinance to a conventional mortgage with a lower rate. This lack of reporting may prevent you from being able to complete the refinance. Don't get caught in this vicious circle.

Poor job security

If you are in a seasonal type of job, or are a contract employee, you open yourself up to a lot of risk if you jump into a mortgage. There is never 100 percent certainty that you will always have a job, but the decision to purchase a home and, thus, take on a mortgage is always made wiser with regular employment.

The short-term investment myth

In hot housing markets, people look to purchase houses that they can quickly re-sell for more than they paid. This quick re-sale, or flip as it is also called, is unrealistic for most people. Real estate has been a good investment historically. The problem is that real estate is really a long-term investment.

There are other short-term investments that can yield people a profit without the inherent risk. Although the real estate market has been hot, there is never a guarantee of profit. Just because property values have been increasing does not mean that this trend will continue indefinitely.

Low cash reserves

Buying a house takes a lot of money. First, you need to have a down payment. Okay, you don't have to have a down payment, but failing to put at least 20 percent down on a house means that you must pay for mortgage insurance.

Not having cash reserves means that there is not money to spend on upgrades or repairs to the house that you buy. When the time comes for a major repair - and make no mistake, they do come - means that you will have to use credit to pay for it. Remember, when you buy a house and take on a long-term mortgage, you are committing your finances for a long time. You need to be in a situation that makes you comfortable.

If you fall into one or more of the above categories, hope is not lost. Taking the time to clean up your credit, firm up your employment, save money and look for the right house will save you a lot of money down the road.