Can you relate to this quote: “I live paycheck to paycheck!”
Yeah? Well, maybe our time would be best analyzing our budget, rather than looking for dream homes. Having savings built up is a key to buying a home.
If you answered “no” then we can move to step 1a.
Calculate your expenses; rent, utilities, phone, internet, food, discretionary (going out, etc).
Now, multiply this by 3… Is it more or less than what you currently have in savings and checking?
We want to have more than at least 3 months worth of expenses in our savings account before we decide to look for a house, this is deemed our emergency reserve. If the emergency reserve isn’t built up to these levels, then we need to get to work on this before we work on locating our next home.
Why does this matter?
We must be able to quickly access funds for continuous home upkeep, the miscellaneous expenses. We have to change AC filters or may have to replace a water heater or even replace a toilet. We want to be sure we have a healthy financial situation to incur these expenses.
Step 2: Stabilize your income
Check the appropriate circle (mentally) that answers the following question:
How do you rate your stability at work?
o Hold my breath every morning – Could be fired any day or the company could fold.
o Have my ups and downs – It’s a roller coaster, but for now I am safe
o Less communication is a positive – Haven’t been told I am making any mistakes and the company is doing well
o They absolutely love me! – No worries on losing my job anytime in the near future.
If you placed your mental checkmark in either of the first two circles, this may not be the best time to start looking for a home.
The last thing that we need to do is utilize a large chunk of our savings and then turn around and have no income stream. Our job will help to pay our mortgage and having no job makes it hard to pay that mortgage!
Make sure you have a steady and reliable income source before even considering buying a home.
Step 3: Corral Your Debt Ratio
Buying a home brings more debt onto our personal balance sheet, let’s make sure we aren’t already loaded with debt.
It’s the debt ratio. Take a look at all the monthly payments you are making on consumer debt (student loans, credit cards, other debt). Add them all up.
Now look at your monthly income (before taxes). And divide the total monthly debts by your monthly income (total monthly debts/total monthly income).
If our debt ratio is greater than 30%, then it’s time for us to turn our focus to reducing our debt before buying a home.
We believe that the highest this ratio can be to make buying a home reasonable would be 28%... but we would like for the ratio to be even lower than that. A good target would be 20%.
Step 4: Understand Your Life Stage
Are you planning to move in the near future (3-5 years)?
If you are unsure that you want to plant roots in your current city, then it may not be best to buy.
Closing costs for a house can range in the mid to high thousands depending on the house you buy and which attorneys are used. This is money that doesn’t come back to you via a sale of a home. And in order to make the costs worthwhile you want to spread them out over several years… 5+.
Life will definitely change, but if you can plan based on some certainties than you should. Thus, if you know you won’t be in a particular city in the coming years, spend time looking for a great condo/apartment, rather than a house.