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How to Know when you’re Financially Ready to Buy a Home

By save.spend.splurge 4 Comments

How to Know You Are Ready to Buy a House

1. You have done the math between renting versus buying

If you are blindly assuming that you are ‘throwing your money away on rent when you could be building equity’ without having done the math of whether or not this is actually true, you could end up as someone who regrets not having done their homework sooner.

Renting is not throwing your money away – you are simply paying for the service of renting shelter with amenities from someone else. You can’t compare the price of rent to just the mortgage payment without at least taking into account how much extra utilities, maintenance, taxes and so on will cost you.

Do the math before you buy. In some areas, it will be cheaper to buy than to rent, and in others, cheaper to rent than to buy.

2. You have a plan in place just in case you lose your job(s)

If you have maxed out your mortgage from the bank and your budget is really tight, all in the name of becoming a brand new homeowner, you might want to reconsider buying a place.

Run through scenarios of how things will play out if you are unable to make the income you are making right now for 3 months, 6 months and 1 year. That way, at least if you do lose your job, you will already have a Plan B in place to cover your mortgage.

If there are two incomes in the household, you might want to consider living (temporarily) on the steadiest one and banking the other.

Even if you don’t lose your job, you might end up having to take time off anyway, due to medical reasons or because there’s a new bundle of joy on the way.

3. You are realistic about what it costs to own a home

Owning a home is not just the mortgage. You have to consider the extra cost of utilities (it is far more expensive to heat an entire home versus an apartment for instance), maintenance (replacing the furnace, windows, etc), repairs (you may end up with a lemon of a house that requires electrical re-wiring for instance), housing taxes, and last of all, fees such as home inspection and realtor fees.

There are plenty more things to consider but those are the main costs above and beyond renting, so don’t just assume if your mortgage is lower than what it costs to currently rent, that you’re in a good spot.

4. You have 20% saved as a down payment

Take this mini quiz to find out if you are financially ready to buy a house. Saving up for a downpayment and creating a new homebuyers budget are only a few pieces of the puzzle. Deciding to stop renting and buy a house is a big deal!

Anything less and you are asking for trouble. If you don’t have 20% saved for a home, how do you expect to be able to pay off the remaining 80%? Having 20% saved is not just having 20% saved, it is proving to yourself that you are able to save that amount of money (hopefully, easily!) and that you are financially ready to take on the extra cost of a home.

5. You have savings set aside above and beyond the down payment

Your entire net worth should not be placed in a single asset, be it all in one company on the stock market, all in a bank in a low interest savings account, or lastly, all in a physical asset – your house.

You should at least have savings and investments set aside from your down payment. I like the ratio of 50/50, meaning 50% invested and 50% as your down payment so that not all your eggs are in one basket.

6. You aren’t buying the home as an income property

If you are factoring in that you will have tenants to pay you rent to help cover your mortgage, you aren’t ready to buy a home.

You can’t rely on anyone to pay your mortgage except yourself, and if you happen to have tenants, consider their rental income a bonus to put towards the mortgage, but not a necessary income to owning a home.

7. The home costs no more than 3X your income

A good rule of thumb is really 2X your income, but I could go up to 3X your income. The ratio is used so that you can see how comfortably you can afford your home.

The bottom line is that owning a home is not just the fun and games of shopping for one, bidding on it and then obtaining the keys to be able to start redecorating and renovating. A home is a real investment and a physical asset that can be difficult to unload for cash if you fall on hard times, so you shouldn’t buy a home and put all your money into one without doing your homework first.

 

How to Know You are Financially Ready to Buy a Home | First Time tips for home buyers | What you need to know when you're looking to buy a house | What to do before you start to buy a house | Home buying tips and tricks you need to do FIRST. #realestate #house #home

How to Know You are Financially Ready to Buy a Home | First Time tips for home buyers | What you need to know when you're looking to buy a house | What to do before you start to buy a house | How to save up for a downpayment for a house #realestate #house #home How to Know You are Financially Ready to Buy a Home | First Time tips for home buyers | What you need to know when you're looking to buy a house | What to do before you start to buy a house | Can you afford a mortgage and a downpayment? How to ensure you have enough money to buy a house #realestate #house #home

Filed Under: Housing Tagged With: buying a home, financial, home

About save.spend.splurge

Sherry (saverspender) got out of $60,000 of debt in 18 months using her budgeting and expense tracking tool, and now blogs over at Save. Spend. Splurge. where she talks mostly about money, particularly spending it (like on clothes!!), but also about style, minimalism, career and anything that strikes her fancy. She has a weakness for butter croissants, macarons, and a well-made cup of tea.

Comments

  1. Tim Yaotome says

    February 18, 2019 at 22:58

    I find it great that you suggested that future homeowners should invest half their money and use the other half to pay for a house’s downpayment. In my opinion, aside from finding how to pay for it, I believe that it is important that they seek advice from a realtor. That way, they would know which real estate is for sale and which ones are accessible to main thoroughfare.

    Reply
  2. Rebecca says

    January 30, 2018 at 20:53

    I appreciate your candor but as a teen mother, I started my adult life early. I guess you can say I’m living my life backwards. That child is in college now and I am looking for a home. It was very hard to save 5% and I’m proud that I did. With your advice I’ll probably never own a home.

    Reply
  3. Troy Erickson says

    February 24, 2016 at 19:24

    It is always best to have a plan and prepare for home ownership. There are lots of additional expenses on top of the mortgage payment to consider.

    Reply
  4. Jack Palmer says

    January 22, 2016 at 07:28

    I like you rule of thumb of looking at homes that are two or three times our income. My wife and I really want to move into a home but just don’t really know if we can afford it. With this rule I think it’ll help us see what would be manageable. I also appreciate how you explained we should have 20% saved for the down payment. Thanks for all the help!

    Reply

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