Buying a house is the biggest purchase you’ll make in your life, and once the papers are signed, you can’t return it, so it’s important to get this one right. The problem is, there’s so much pressure to buy a house as soon as possible that it’s easy to rationalize why you need to buy one right now!
From hearing comments about “wasting” money on rent, to seeing your friends buy THEIR own houses, to speculation about rising home prices, it’s perfectly understandable to want to lock yourself into an affordable mortgage at a low interest rate and get started on all those Pinterest home decorating projects you’ve been daydreaming about.
I understand the longing to be a homeowner. After living the apartment life for over a decade while my friends hosted dinners in their recently purchased homes, I was beyond ready to buy! But more importantly, I knew we were financially ready. And I’m grateful we waited for the right time to buy for OUR family, not our friends’ and neighbors.
See, buying a house involves a lot more than a mortgage payment. There are SO many costs to consider, not to mention lifestyle changes that come with being a homeowner. These aren’t necessarily good or bad things, they’re just realities, and you want to know EXACTLY what you’re getting into before signing the closing documents.
If you’re thinking that you might be ready to buy a house now or even a few years from now, here’s what you need to do to prepare.
First, pay off all your debt. This includes student loans, credit cards, personal loans, even car payments. PS, did you know that if you close your credit card accounts and all debts are paid off, you can have a credit score of zero?
But wait, you can’t get a mortgage without a credit score, can you? Actually, yes, you can! Lenders can underwrite your loan application manually. All you need to prove is a history of paying your rent and other bills on time.
All that aside, if you pay off your debts yet keep some accounts open, you’re bound to have an excellent credit score, so don’t go increasing your credit limit to prepare for a mortgage! Just stick with your debt-free status and you’ll be fine.
After you’re completely debt-free, save three to six months of living expenses for emergencies. This is your full emergency fund, and it is of the utmost importance to have. I know it seems like a lot of money, but houses require a lot of maintenance and emergency repairs WILL happen. You never know if your heater will quit in the middle of winter, or if your basement will flood, or when fence posts will need fixing, or a sprinkler will bust, or a window will break, or… okay, you get the idea! When you own, you’re responsible for fixing EVERYTHING!
If you’ve got thousands of dollars stashed away for these things before you move in to your new home, repairs will be a minor inconvenience instead of a recipe for financial disaster. I want you to LOVE your home, and that will only happen if you have the money to take care of it.
Once you have your full emergency fund of three to six months’ expenses in place, you’re ready to save for a down payment. To be totally candid, there are different points of view on how much to put down, and they all have some merit. My recommendation: aim to put down 20% to avoid paying private mortgage insurance (PMI). PMI can easily be $100 a month or more, and you have better things to do with your money.
This brings up another question: 20% of what? How much house can you afford? This is another topic that financial experts tend to disagree on! On one end of the spectrum, some financial coaches and advisors will say to borrow as much as you can for as little down as possible. On the opposite end of that spectrum, Dave Ramsey recommends only borrowing what you can get on a 15-year mortgage, and that the payment, taxes, and insurance don’t exceed 25% of your monthly take-home pay. Even better if you pay for the whole thing in cash!
For the most part, I lean toward Dave’s advice on this one. We have a goal of getting our house paid as fast as possible, hopefully in even less than 15 years (fingers crossed). Just think what you could do without a house payment! However, I do think you need to consider market conditions and interest rate trends.
Allow me to unpack that a little because there’s an important distinction to make.
Let’s say you can qualify for a 20-year loan, you have a 20% down payment, you have excellent visible cash-flow (your job field is ultra-stable) and interest rates are moving in an upward trend, I’d probably buy now rather than wait a year or two.
But, if you’re in debt up to your ears and you’re worried about getting priced out of the market in three or four years, I’d most definitely wait until the timing is better for YOU. You can’t predict what interest rates or the housing market will look like that far off, so don’t let fear of tomorrow cause you to get into a financial mess today.
Those are some good basic spending parameters, but there’s a little more to answering the question of how much to spend on a house.
Which is why I’m going to share with you the single wisest piece of advice I have ever received about home buying. I got this advice from a financial coach who has worked with Dave Ramsey AT Ramsey Solutions for years, so ya know it’s from the best of the best! Here’s what he said:
Think about the lifestyle you want to have, then make your budget with that in mind, and THEN see what kind of mortgage fits into your budget.
How many people do you know who struggle to make their house payment, or wish they had bought a smaller home in exchange for the ability to give more, and do more? A house isn’t supposed to hold you back from doing the things you want to do with your life; the mortgage needs to acquiesce to your lifestyle, not the other way around.
The next thing to consider is adding a house maintenance fund to your budget, ‘cause the thing is, you don’t want to dip into that emergency fund unless it’s a REAL emergency. And for the most part, you should be anticipating regular maintenance needs. You will need a roof every 20 (or so) years. You will have to replace the water heater. Appliances will break down. So, make sure to budget at least a couple hundred bucks a month for maintenance, and keep in mind this is a very general amount; the amount you need is going to depend primarily on the size of the house and the materials it’s made of, so you’ll want to crunch some numbers and get a ballpark estimate.
Before we moved into our house, we altered our budget for four months to see what life would be like with the new mortgage payment and higher maintenance costs, and we put the extra money aside in savings for moving expenses and furniture. It gave us a realistic picture of what we could afford and gave us the confidence to feel comfortable with our decision. As important as it is to have the budget work out on paper, I definitely suggest taking a few months to live on your new estimated budget before committing to it. That way, you get to feel the numbers, which is totally different than seeing it hypothetically on a spreadsheet.
The home buying process can either be a blessing or a curse. If you wait until you’re financially prepared to buy and know what you can afford, it will be a blessing. Otherwise, you’re likely to end up trapped with a mortgage you can barely handle or making lifestyle sacrifices you regret. Get out of debt, build a robust emergency fund, save a 20% down payment, and budget realistically for home maintenance so that you can love your home, and your life.