Buying a new home isn’t for the faint of heart. There are questions galore, terminology to learn and most of all, it’s a huge financial and emotional undertaking. However, it is also an exciting time that still represents the “American Dream” for many people.
Aside from accepting the commitment and responsibility that come with a home purchase, how do you know you’re actually ready to dive in? Here are five ways to know you’re ready to buy a home:
- You have a fully stocked emergency fund. Your emergency fund should consist of at least three to six months of “must have” expenses stashed away. This means you have savings to cover bills, mortgage payments, groceries, and the essentials to get by during that period. This money should be in a bank account that is out of sight and out of mind and shouldn’t be considered as part of your down payment fund.
- You’re in touch with your budget. Homeownership can turn your budget upside down. If you’re involved in your household budget, you know it’s important to account for changes in housing costs, home insurance, utilities, homeowners association dues, yard maintenance, home upgrades and more. A good rule of thumb to consider is that no more than 28% of your gross monthly income should be used to pay for PITI (principal, interest, taxes and insurance).
- You’re saving at least 10% of your income. Homeownership can eat into your financial resources, so it’s important to maintain progress for other financial goals while you’re in your new home. If you find that you’ll need to reduce saving for retirement in order to make your house payments, you may want to reevaluate how much home you can afford. However, if you’re willing to cut back in other areas, such as dining out or travel, because owning a home is more important to you, you will be prioritizing what ways your money can make you happy.
- Your credit score is in great shape. Your credit score is your financial report card that will be with you for life, either saving or costing you money along the way depending upon your spending habits, responsibility with bill payments, and overall debt-to-income ratio. A good credit score can translate into lower interest rates (and money saved), while a bad score will result in higher interest rates (and more money out of pocket). Having a good credit score is an important part of purchasing a home because with a balance as big as a mortgage, the higher the interest rate, the more you’ll be paying (to the tune of tens of thousands of dollars) over the lifetime of the loan.
- You don’t have a lot of transition ahead. When you think about where you want your life to be five years from now, are you still with the same company and living in the same city? Is your family size relatively the same? If you’re in a stable situation, homeownership can make a lot of sense. However, if you see a change in career (and income), are growing a family or moving to a new place, buying a home might not make the most sense while things are transitioning in your life. When buying, ensure that it’s a home and city you’ll be committed to for a while.
This is a small checklist of items to ensure you have your financial ducks in a row. If you have these areas checked off, it’s time to start thinking about the type of home you’d like to buy.
Having the above items checked off your list is a great start to ensuring you have your financial ducks in a row. Now the fun part of exploring homes, landscapes, architecture and discovering your wants versus needs begins! Enjoy the process and happy house hunting!