5 Reasons Why You Shouldn't Buy a House Right Now

Home for saleBy Christopher Maag

Heather McClane still believes in the American Dream. Even now, five years after the mortgage bubble burst and with lingering uncertainty about the housing market and the economy as a whole, McClane desperately wants to stop renting.

"I want a home so badly for my family," she wrote in response to a Credit.com story, "especially my children."

McClane's dream of homeownership is further clouded by her own unpaid bills. Four years ago, McClane entered a hospital and racked up a $25,000 bill, which she never paid. That lingering unpaid bill is causing her credit score to remain stuck at 709, she says.

"Five years ago, 709 wasn't too bad," says Barry Paperno, Credit.com's credit scoring expert. "Nowadays it's pretty terrible. But it's not far from being good."

'A Credit Score Is Not a Report Card'

Between her low score and her unpaid hospital bill, McClane is finding it impossible to get a mortgage.

"I am unable to get a loan due to the massive unpaid medical bill!" McClane writes.

Here's the surprise: Maybe that's not such a bad thing. According to some credit experts, it's not necessarily an injustice that consumers like McClane can't get mortgage loans. After all, from the point of view of a prospective lender, an unpaid bill in the past might signal that a consumer will forego paying a loan in the future.

"A credit score is not a report card," Paperno says. "It doesn't look backwards in time. Rather, what it does is look forward and try to predict the likelihood that someone will repay a loan in the future."

But what if McClane's inability to buy a home right now is actually in her best interest, too? As we've learned from the bursting mortgage bubble, homeownership comes with risks. Even as the housing market begins to show its first signs of prolonged health since 2008, here are five reasons why people with damaged credit maybe shouldn't buy a house right now.

1. Home Prices May Still Go Down

Just because prices have stabilized in most cities for the last few months, there is still an excess inventory of about 2 million homes in the United States, according to an estimate by A. Gary Shilling, a financial analyst. "That is huge," Shilling wrote in The Wall Street Journal in May.

That means home prices, which already have tumbled 36% from their peak in 2006, will probably keep falling, Shilling says. That's especially true since many sales moving forward will be on previously foreclosed homes, which sell at a 19% discount compared to similar homes.

"At current rates of housing starts and household formation, it will take four years to work off the excess inventory, plenty of time for those surplus houses to drag down prices," Shilling says.

2. Bad Credit = Higher Rates

Forget all you've heard about record-low interest rates, which are hovering at about 3.5%. If you get a mortgage with poor credit, your interest rate will be significantly higher, warns Gerri Detweiler, Credit.com's consumer credit expert. That high rate will cost you lots of money in coming years, no matter what happens in the broader economy.

"You may get stuck with a high interest rate and not be able to refinance it in the future if the rates go up," Detweiler says.

If you're curious to see how much it'll cost you to get a loan with poor credit, check out this handy calculator. Let's assume McClane purchases a new home, which currently sells for a median price of $224,200, according to the U.S. Census Bureau. With a perfect credit score and the lowest-available interest rate, she would pay $144,383 in interest over the life of a 30-year mortgage, according to the calculator. Now let's assume McClane purchases the same house, but her low credit score gives her an interest rate of 9%. That causes her interest costs to multiply, forcing her to spend $428,669 just on interest.

If McClane is daunted by a debt of $25,000, imagine how she might pay a six-figure interest charge. Instead of rushing to buy a home now, she may be better off postponing such a major purchase until she can build her credit score, since doing so could save her much more than the $25,000 she owes.

3. Few Affordable Houses to Buy

Home prices plummeted after 2008. Many people who paid boom-era prices for their homes now find themselves deep underwater, and many are refusing to sell. Those houses tend to be precisely the kind of smaller, less-expensive starter homes that first-time buyers like McClane want to purchase, says Lawrence Yun, chief economist for the National Association of Realtors.

"There are notable shortages in the lower price ranges which are limiting opportunities for first-time buyers," Yun said during a press conference.

4. Beware the Cash Trap

Making the down-payment is only the beginning. Once a consumer like McClane has purchased a home, she is in for a host of new expenses. That includes insurance and taxes, as well as unexpected things. Without sufficient money in the bank, those unexpected bills could hurt McClane's ability to pay her mortgage.

"You might use up all your cash for the down-payment and then you don't have a cushion in case the house needs repairs or you have other unexpected emergencies," Detweiler says.

5. A Big Purchase Now Actually Hurts Your Credit

It's a little-known phenomenon that getting a new loan or credit card now actually hurts your credit score in the short term, Paperno says. That small dip could spell big problems, especially if your new home requires other credit purchases, like a loan for a pickup truck or a credit card from Home Depot.

A lower score could make it more expensive for you to borrow money, and it might even make it impossible for you to get new credit at all, especially if your credit score is already low.

"Buying now could lower your credit, which could make other forms of credit more expensive," Paperno says.

See more on Credit.com:
• Do You Have a Good Interest Rate?
• How to Shop for a Personal Loan

• Snapshot: The Housing Market Right Now

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A Reverse Mortgage is a non-recourse loan, which means the repayment amount cannot exceed the value of the home. The loan typically does not have to be repaid until the borrower passes away, sells the house or permanently moves out.

November 26 2013 at 6:16 AM Report abuse rate up rate down Reply
Smart Realestate

"No one can deny your great efforts in passing this important information, I tried it also and it really helps but I would to add just more few tips , if you don't mind for sure.
There’re several things that you need to consider when you decide to search for a Real Estate property whether it’s a flat, apartment or even an office. There’re some criteria that you need to look for and upon these criteria you start to make the decision whether this property will fulfill your needs or not.
First, if you found a property that you like, visit it in different times in day.This help you determine how’s the neighborhood’s activity is like at day and night, is it quite, noisy or dangerous. One more thing that’s important is getting to know how the traffic is in different times in the day and night. Maybe there’s a factory near your home that may change the smell of the air. You’ll be surprised when you visit the property in different times.
Best Regards,

Pillar Joe

August 01 2013 at 6:42 AM Report abuse rate up rate down Reply
Eric Minimalism

Excellent points about not buying a house. I've condensed some of the points and expanded on why you SHOULDN'T BUY A HOME at: http://greenminimalism.com/2013/07/05/dont-buy-a-home-9-reasons-not-to/

July 05 2013 at 3:01 PM Report abuse rate up rate down Reply

Horrible time to buy.

1. Case Shiller index still at 174 meaning homes are still unaffordable and prices will go down once the fed stops helping his buddies on wall street

2. Beranke and Wall Street are in the middle of another bubble.

3. Homes held off the market by banks to hike prices. Who wants to buy a starter fixer upper for 400K with average salary of 60-70K?

4. Only realtors will tell you its time to buy, because they're out of a job since no one can afford to compete with wall street.

5. Getting suckered into "low interest" FHA loans where you end up paying 1% more and (soon) MI for the life of the loan is NOT WORTH IT. Buying a 380K home with 10% down will leave you with a$150-180/mo INSURANCE PAYMENT until you reach 20% equity.

March 04 2013 at 12:07 AM Report abuse rate up rate down Reply
Rahji Punjab

so this dumb sow wants to buy herself a house but refused to pay her medical bill?

December 09 2012 at 9:25 PM Report abuse rate up rate down Reply

This "author", excuse me, blogger, isn't even a real estate expert.

Just because you want to play Devil's Advocate for click-bait does not mean your counterarguments are relevant or even worth the time wasted to examine them.

October 30 2012 at 2:46 PM Report abuse rate up rate down Reply
Warren Whitaker

Thank you for one of the funniest comments of the week..."Five years ago, 709 wasn't too bad," says Barry Paperno, Credit.com's credit scoring expert. "Nowadays it's pretty terrible. But it's not far from being good."

I hope Barry is aware that a borrower with a 709 credit score - all things considered - can get a 30 year fixed rate of 3.5% or LOWER.

Let me correct Barry - a 709 credit score is NOT terrible - geesh...

Warren Whitaker

October 18 2012 at 9:58 AM Report abuse rate up rate down Reply

Hello...now is the time to buy and if she has that medical bill in 3yrs it can be removed....she should've had a better insurance company anyway...buy now if you can. Even if the interest is 5% that's still good....don't put any money down save that it only changes your pmt at the most $50 bucks!!

Happy House Hunting!!

September 11 2012 at 11:47 PM Report abuse rate up rate down Reply

Maag, You are wrong.

September 11 2012 at 12:23 PM Report abuse rate up rate down Reply


September 11 2012 at 11:44 AM Report abuse rate up rate down Reply