8 Signs You Should Not Buy a House

If you have been trying to decide whether to buy or rent, you know there is no easy answer. The decision depends on a variety of personal factors, including your finances, geographic location, and life situation.

Before it became obvious we were in the midst of a housing bubble in 2007, conventional wisdom portrayed home-ownership as a sure-fire investment. Home values that were widely expected to continue rising and loose, plentiful credit clearly attracted many who were not really in a position to buy.

By now, people have become less likely to jump into a mortgage, but the last several months have generated new confusion. Lower prices and the new-homeowner tax credit  (due to expire in December 2009, but Congress is considering an extension) make buying look attractive, but concerns remain over whether the housing market has stabilized.

So, should you buy or rent? There are several questions you should ask yourself before committing to a mortgage. If any of these eight scenarios describes you, err toward renting.

1. You are unsure how long you will be in the area. Rent until you're sure you will settle somewhere for at least five years.

2. The price-to-rent ratio is too high. Divide the purchase price by the annual rent you would pay to lease a comparable home. If the ratio is close to 20 or higher, be wary. For context, the national average in the 1970s, '80s, and '90s was between 10 and 14 according to the New York Times, but the ratio remains above 20 in many areas of the country after prices outpaced rents during the past decade.

3. You're thinking about tapping your retirement savings. This should be obvious, but if your retirement savings are the only way you could make the down payment, you do not have enough savings to buy a house. Set up a separate savings account.

4. You have credit card debt. Pay off your credit cards before you think about buying a house. Paying off high-interest credit card debt offers a guaranteed return that almost certainly beats the benefits of home ownership.

5. You do not have an emergency savings account. You should have money set aside to cover unexpected emergencies or job loss. Putting all of your money into your home puts you at risk for not being able to cover your payments in the event of an emergency.

6. The mortgage payment is too high relative to your income. Generally, your fixed housing costs, including monthly payments, taxes, and insurance, should be no more than about 30% of your gross income. If the percentage is too high, either look at less expensive properties or rent.

7. You don't want to deal with maintenance. Basic upkeep requires significant time and effort (and expenses) that your landlord would be responsible for if you rented. If you lack either the time or inclination to undertake home repairs, consider renting.

8. You think your life situation might change. Do you think you might get married or have kids in the next several years? The property that meets your needs now might not be a match in a few years.

There is no simple answer to whether you should buy or rent. Your responses to these questions should get you started, but passing this test does not necessarily mean you should buy. Several sites offer calculators that compute a response based on variables you enter. Check out the buy vs. rent calculators at BankRate and New York Times to help with your decision, but remember that these tools cannot fully capture your personal situation.