5 Signs You’re About to Buy a Home You Can’t Afford

Couple walking into new home
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Purchasing a home is a tumultuous process — one that can be exciting and hopeful at times, frustrating and disappointing at others. Those ups and downs can wear you out and cloud your judgment, to the point where you make impactful decisions you may later come to regret. One such decision that prospective homebuyers often make is purchasing a home they cannot afford.

While banking requirements to get a mortgage today are tighter than they were before the 2007 housing crisis, homebuyers can still easily find themselves biting off more than they can chew — and may not realize it until after the purchase is complete.

Here are five signs you are buying a home you cannot afford.

1. Creative Mortgage Terms

If the conditions of your financing look like a trail mix of mortgages (e.g., first mortgage, second mortgage, interest only, adjustable rate, extended term, and a balloon payment), that is a significant indicator that you cannot afford the home you are looking to buy.

Likewise, if your broker encourages you to accept mortgage terms that are less than ideal with a plan to refinance somewhere down the road, that in itself is a red flag, as there is no guarantee you will be able to refinance into better terms.

If the financing feels forced in any way, you are bringing on more than you can handle and may later find yourself in trouble.

2. Down Payment Assistance Programs

There are many programs designed to help homebuyers with their down payments and closing costs. While these programs are intended to remove the barriers to homeownership as well as stimulate the housing economy, what’s meant to be a help isn’t always.

If you are not prepared for the financial aspects of purchasing and owning a home, getting into one before you are ready or getting into one you could not afford without the assistance will do you more harm than good.

3. You Have Just Enough to Cover the Payment

You’ve done your due diligence and used a mortgage payment calculator to figure out that you can fit the new payment into your budget.

There’s no wiggle room, but you feel you can “make it work.”

Keep in mind, the cost of homeownership goes way beyond your mortgage. In addition to your monthly payment, you'll need to cover the costs of maintaining and upgrading your home and property. And you'll need to be able to handle the unexpected — a broken appliance, a leaky roof, or the many additional expenses that come with owning a home.

4. Borrowing From a Retirement Account

Many homebuyers borrow from their retirement accounts to help cover their down payment. While it’s true that you can withdraw funds penalty-free from a Roth IRA to buy your first home, it’s also true that you are unplugging funds that were intended for the future.

Remember the reason you chose to save for retirement in the first place. If dipping into your retirement savings is your only option for purchasing a home, that is a warning sign.

5. You Have a Sinking Feeling

It’s not uncommon to get cold feet before the biggest purchase you ever make. But if you can’t shake the sinking feeling that you’re about to bite off more than you can chew, then this intuition can be the greatest indicator that you are walking a path you should turn back from.

It’s not easy to admit, but you will know deep down if the home you’re buying is too much.

If you have doubts or misgivings, you’ll be doing yourself a favor by paying attention to them — even if it means passing on the home you had your heart set on.

Avoid Making a Decision You’ll Later Regret

Because purchasing a home is such a significant decision, make sure you are approaching it with a clear head. Do not get so get caught up in the emotion of owning a home that you are blind to the reality of the situation you are entering.

Ideally, your team of professionals will guide you to the best decision for you. But your mortgage broker and real estate agent might have their own mortgages to pay, and may steer you in a direction that benefits them. You will need to be the one to realistically review your options and choose what is best for you.

If you want to avoid going down a path you may later regret, be aware of these warning signs, and be willing to delay the purchase of a home until you can afford it.

You’ll thank yourself later!