4 Huge Red Flags That Suggest You Aren't Ready for a Mortgage

If you are thinking about buying a property, you probably will need a mortgage.

But, just because you dream of becoming a homeowner doesn't mean you should rush out and get a home loan. A mortgage is a major financial commitment and you don't want to jump into agreeing to pay thousands of dollars a month for decades until you are certain you are ready.

To make sure you aren't moving too quickly with getting a mortgage, watch for these four huge red flags that suggest you aren't really in a position to borrow. 

1. You don't have an emergency fund 

Once you commit to a mortgage loan, you will have to pay it for many years. If you experience a job loss, medical issue, decline in income, or other financial or personal disaster, your obligation to pay your home loan doesn't disappear. 

If you don't keep paying, you could get foreclosed on, causing you to lose your house and ruin your credit. You can't just sell the house right away if disaster strikes, as it takes time and money to find a buyer. 

So, in order to be sure you're ready to take on this commitment, you need to make sure you have an emergency fund. Ideally, you should save enough to cover three to six months of living expenses -- including your new mortgage payment. That way, you won't have to worry about being unable to pay if something goes wrong. You'll be able to keep making your payments from your emergency fund until your financial situation improves or until you sell. 

If your emergency fund is at $0 or has a low balance, this is a big red flag and you should not borrow for a home until you've got some savings to fall back on. 

2. Your credit is in bad shape 

If your credit score isn't very good, this is a huge red flag. That's because you're going to get stuck paying a whole lot more for a home loan if you don't have great credit.

If you borrowed $300,000 at the national average interest rate as of June 4, 2023, your monthly interest rate would be 6.467% and you'd have a monthly payment of $1,890 if your credit score was 760 to 850 and you took out a 30-year loan. But if you had a score of 620 to 639, your rate would be 8.056% and your payment would be $2,213 per month. 

There's a big range of rates between a 760 and a 620 credit score, but the bottom line is, the higher your score, the lower your home loan costs will be. Try to wait until your score is at least in the 700s before borrowing if you can. 

3. You have a ton of debt 

Having a lot of debt is another big red flag. Having tons of debt can hurt your credit score, and, as mentioned above, that's not a good thing when you're borrowing.  

Lenders also look at your debt-to-income ratio, which is your debt relative to earnings. Ideally, your new housing payments should not eat up more than 28% of your income and your total debt payments should be below 36%. If you have too much debt to meet these ratios, you'll have less choice of mortgage lenders and your rates will be higher.

You may also simply want to work on paying off other high-interest consumer debt before committing to a mortgage, so you can eliminate those payments and not have to worry about them once you've committed to a home loan. 

4. You're worried about affording the monthly payments 

Finally, the biggest red flag of all is if you don't feel comfortable with the payments you are taking on. You don't want to doom yourself to living in financial stress and spend the next 15 to 30 years worrying about whether you'll be able to make the next month's bill.

If you don't feel completely confident you can cover your mortgage costs, either wait to purchase or scale down your expectations so you can borrow less. In fact, if you spot any of these red flags, those are the right moves to make as you don't want to be left with regrets.