Am I Ready to Buy a House?

By Lance Ludwig, CFP^®

If you’re anything like most Americans, owning a home is one of your top financial priorities. In a recent survey by Chase, 87% of respondents said that buying a house is something they have always wanted. It’s a worthy goal. Not only can owning a house help to build your personal wealth, but a house is also likely to become your ‘home sweet home’ for many years to come. This makes deciding when to buy—and what to buy—among the most important financial decisions you’ll make in your lifetime.

How can you be sure to make the right choice for you? Follow these 4 basic steps to help find a house that fits your budget, fits your life, and positions you for success for as long as you own your home:

1. Build an emergency fund.
   Saving for financial emergencies isn’t nearly as exciting as saving for a home, but it’s the #1 step toward reaching your goal. The last thing you want is to feel stretched and stressed when an unexpected expense comes up, but owning a home means your mortgage payment has to come first. A good rule of thumb is to stash away 3 to 6 months of expenses—including your rent or mortgage payment, utilities, food, car payments, insurance, and other necessities. Having this cash cushion is the best way to keep the stress of owning a home to a minimum.
    
2. Save plenty for your down payment.
   With housing prices at all-time highs and student loan debt an unfortunate reality for many first-time homebuyers, it can be harder than ever to save 20% of the total cost of a new home, but like it or not, that is the ideal number to shoot for. The reason? If you put down less than 20%, you’ll be hit with PMI insurance—or Private Mortgage Insurance—which protects the lender if you default on the loan. And it’s not cheap! PMI ranges from 0.5% to 1% of your entire loan amount every year. That means that PMI insurance on a $200,000 loan would add almost $2,000/year to your payments (assuming a 1% PMI rate)—none of which goes toward paying off your loan! And remember: what you save for your down payment is not part of your emergency fund; you need both buckets of money to make your home purchase with confidence.
    
3. Calculate & budget for the total monthly cost of ownership.
   Too many people make the mistake of budgeting from a renter’s perspective: “I’m paying $1,000 in rent now, so I can afford a $1,000 mortgage.” But owning a home adds a whole boatload of other expenses you don’t have as a renter. To be sure you’re covering all the bases, calculate your total monthly expenses, including your mortgage payment, PMI (if you must!), property taxes, home maintenance, and even new furniture. To budget for repairs, a great rule of thumb is to set up an automatic deposit of about 1% of the value of your home every year into a dedicated savings account. When it’s time to replace your roof, water heater, or old septic system, you’ll have the funds at the ready so money is the last thing you have to worry about.
    
4. Get pre-approved by a lender before you start shopping.
   Buying a home is emotional, which can make it all too easy to fall in love with the ‘perfect’ house when you’re shopping around, only to find out later that you simply can’t afford it. At best, that scenario is disappointing. At worst, you may convince yourself to buy anyway and get in way over your head financially. The best way to avoid both situations (and to give you an advantage when negotiating a sale) is to get pre-approved by your lender. Aim for keeping the combined total of your potential mortgage, insurance, and escrow account to no more than 25% of your monthly take-home pay. And make sure to talk to your financial advisor to be sure you can really afford the payments!

Of course, finances aren’t the only considerations when looking for the perfect house for you. For a variety of reasons, I never recommend buying a home unless you’re near certain you’ll be in the same location for two years or more. Other things to consider are:

• How much time is needed to maintain the property? If you (or you and your other half!) work 40+ hours a week and come home ready to relax, you may not be thrilled about sitting on a mower for hours every weekend to tackle multiple acres of grass. And a fixer-upper may look less expensive on paper, but time and money can add up when it’s time to do the fixing! Be realistic about how you want to spend your days, nights, and weekends before making your choice.
   
• What stages of life do you want your house to support? Do you have—or are you planning to have—children? Then you’ll want to choose a house in a desirable school district. Are you hoping to ‘age in place’ in your home? Be sure the house you choose is the right size and style for an older person, and that it’s located close to shops and services, as well as your children or grandchildren, if that’s a priority.

Lastly, don’t venture into the world of home buying without hiring a professional realtor. A realtor can help you every step of the way, including finding available properties (sometimes even before they’re officially on the market), pricing homes, evaluating a home’s structure and mechanical soundness, and working with the inspector to be sure you know what you’re really getting. A realtor can also help with the often-emotional process of negotiating the sale. Just as you rely on your financial advisor to keep you on track by taking the emotions out of the investing equation, a professional realtor can help keep your emotions at bay to be sure you make your first step into becoming a homeowner your best step toward creating your own ‘home sweet home.’