Here's How Buying a Home Can Be a Disaster for Your Finances

Perhaps you heard the same phrase growing up as I did: "Renting a house is throwing money away!" But the world is far different now than it once was, and salaries sure haven't kept pace with rising housing costs. As a result, many Americans can't afford the upfront and ongoing costs of owning a home, and are effectively shut out of getting a mortgage.

But even if it looks on paper as if you might be able to afford to buy a home, it still pays to approach with caution. The first time I bought a house, almost 15 years ago, I was fortunate enough to have family help with the upfront costs. And my mortgage payment wasn't much more than what I was paying to rent an apartment.

But buying a home at that time was easily the biggest financial mistake I've ever made.

Don't be like me! Read on for a few scenarios in which becoming a homeowner can spell doom for your finances.

When you have a lot of debt

It might be unrealistic to insist that you have paid off all your other debt when you set out to buy a home. I actually pulled this off before becoming a homeowner again just recently (and now I'm the proud owner of a shiny new mortgage -- even more debt than before!). But I had the good fortune to have already paid off my car and my education, and I was able to pay off the rest of what I owed thanks to taking on a side hustle.

If you have manageable lower-interest debt, like a reasonable monthly car payment or other loans, you might be fine to buy a home. But if you have high-interest debt, like credit card debt, it's a really great idea to pay that off before trying to buy a house.

Credit card debt comes with high and variable interest rates -- the average rate on cards charged interest was 22.76% in May 2024. That means your debt can easily spiral out of control. It's a good idea to give yourself as much budgetary breathing room as possible if you're taking on the (sometimes unpredictable) costs of homeownership.

When you have no emergency fund

This was part of my problem the last time I was a homeowner. My now former spouse and I made enough money to be successful renters, but we had no savings. When I found myself out of a job just two years after we moved into the house, there was no fallback plan and no emergency fund to cover the bills.

It's a great idea to have a solid emergency fund before you contemplate buying a home. This means enough money to cover three to six months' worth (or more, depending on your line of work and comfort levels) of expenses, ideally in a high-yield savings or money market account. This money can save your bacon (and interest costs) if an unplanned repair comes up -- or you get laid off from your job.

When you're living an unsettled life

This was the other part of my problem last time. I was just a few years into my previous career in nonprofits, which came with neither a high salary nor the ability to remain in one place and hope to find a new job in the same city.

So when I was let go, I knew I'd have to move for a new role -- and having to sell a house after just two years of living in it usually means losing money. Breaking a rental lease, on the other hand, is usually pretty easy and costs far less than selling a house.

In my case, I ended up needing to get my mortgage lender to agree to a short sale. I got free of my obligation, but it trashed my credit score, which took me years to rebuild. Adding insult to injury, I also went through a divorce soon after.

In short, my life wasn't suited to owning a home, and I never should have pursued it.

Things are different now. My new career is fully remote, meaning I no longer have to move for work. And my finances are solo -- I don't have any joint financial commitments or bills with anyone else. I bought my new house on my own, and while this is a big, scary responsibility, I wouldn't have it any other way.

Are you actually ready to buy a home?

Here's a quick checklist to help you answer this question:

• You have a low debt-to-income ratio: Ideally, you're spending less than 36% of your income on debt, including your mortgage.
• You have an emergency fund: Or at least don't live paycheck to paycheck. You also might need to show a lender that you have reserve cash to even get approved for a mortgage.
• You expect to stay in the house for several years: If your career constantly has you moving, buying a house is a bad idea.
• Your credit is in solid shape: The better your credit score, the more you stand to save on a mortgage -- so if your credit needs work, focus on increasing your score first.

Ideally, becoming a homeowner makes your life better. And you should buy a home because you want to and when your finances are in good shape -- not because someone told you renting was a waste of money.