Deciding to Buy a House – When Are You Ready?
A couple weeks ago, we wrote a step by step guide to home buying, and step one is making the decision to buy. So, you’ve been thinking about buying a home, but aren’t quite sure if you’re ready. It’s a big decision, and now is an amazing time to buy. Prices are still low, the market seems to be starting to recover, and the current interest rates unbelievable. Are your lifestyle, your job, and your financials ready to buy though?
One of our goals is to never have a buyer/client go through foreclosure after selling them a house. Obviously some aspects of a person’s financial or job situation are well beyond our control. Although, we can offer advice as to when we think you are financially ready. We’ve had a lot of people come to us wanting to buy a house when they are on very shaking financial ground. We will be completely honest with these people and tell them, “We think you should wait a bit to buy a home.” We would rather see a buyer comfortable and happy in the long term rather than happy in the short term, but in serious trouble a year from now.
In our opinion, these items are must haves in order to buy a house:
- 3 month emergency fund – Take your monthly expenses (including your projected mortgage payments) and multiply it by 3. You should have this much set aside as a safety net.
- Stable income – If your job is questionable, or you go through temporary layoffs, you probably want to look for a more stable income. The exception would be somebody who has budgeted well and makes enough of an irregular income to spread out throughout the whole year.
- Plans to stay for 3 years – If you don’t plan to stay in the same place for 3 years or more, your likelihood of losing money when you sell is higher. If your location is short term, just rent.
- No credit card debt -If you have credit card debt, your part of the norm in America. Life and home ownership is so much easier without credit card debt. Please get rid of these payments before buying a home.
These are recommendations, but not necessities:
- 6 month emergency fund – Take your monthly expenses (including your projected mortgage payments) and multiply it by 6. You should have this much set aside as a safety net.
- No student loans – You’re likely going to be paying on that mortgage for a long time. Just knock this debt out before you have a mortgage payment.
- No car payments – Seriously, you bought an expensive fancy car before a house? Cars go down in value; real estate generally goes up over the long term. I’d take a mortgage over a car payment any day.
- No debts at all – If the only payment you have is a mortgage think of how much simpler and comfortable your finances will be.
- 15% of your income going toward retirement – Many people look at home ownership as an investment, but let’s face it; your home is not a retirement plan. You still need a place to live when you are retired.
- 20% Down payment -While there’s still low money/no money down loans out there. You’ll find yourself much more comfortable and getting a better interest rate if you have money to put down. 20% down will get you the best rate and avoid PMI.
These are signs you are not ready to buy
- You live paycheck to paycheck – if you are waiting on the next check to come in to pay your next bill, you are probably too tight on cash for home ownership.
- You pay minimum credit card payments – If you are only able to pay minimum payments now, how much harder is it going to be once you have a mortgage and home to maintain?
- Unexpected expenses throw you off for months – When your car breaks down, does it take you several months to get caught back up? This is a sign you don’t have a good emergency fund. Keep in mind, once you buy a house, you no longer have the landlord to call for repairs, you’re responsible.
- You’re worried about every penny of closing expenses – If you are stressed about your closing costs being $1800 vs $1725, you definitely don’t have enough cushion.
If you’re not quite in position to buy, there’s a lot you can do to get yourself in position to buy. First, start tracking your expenses and set yourself a budget. A structured budget will quickly help you see where you are wasting money. Then cut back on your wasteful expenses and pay down your existing debt. Lastly, if there’s still not much extra room in your budget, pick up some overtime or get a second job. Once you get accustomed to living on tighter finances to get rid of your debts and save a down payment, you’ll find paying a mortgage payment and maintaining a home a breeze.