How to Determine If You’re Ready to Become a Homeowner
Are you thinking about buying a new home? Are you unsure whether you can afford it? The first step in the process is to take a look at your current expenses.
Debt
Do you carry any high-interest debt, such as credit card debt with an interest rate over 8%? If so, you may not be ready to buy a home just yet. Focus on paying off your credit card debt before you start shopping for a home. The mortgage isn’t the only bill you’ll have to pay. When you are a homeowner, you are responsible for covering maintenance and repair costs.
You’re also likely to want to decorate and furnish your home, which will increase your expenses. You will need to pay for inspections and closing costs, some of which will come out of your pocket. Unless you get a loan from the Veterans Affairs (VA), you will also need to make a down payment on the home.
In short, buying a home is expensive. If you’re in debt, you may not have the ability to handle all these payments. Think of renting as a price for patience, to quote bestselling author Dave Ramsey. Focus on overcoming credit card debt before you add more financial responsibility.
Emergency Savings
Are you debt-free? Congratulations. The next question: Do you have an emergency fund? Keep three to six months of your essential expenses in a savings account that you don’t touch unless there’s a real emergency, such as losing your job. It’s not money you use for holiday gifts. It’s the money you use when your car breaks down in the same week you have a large hospital bill due.
If you don’t have an emergency fund, you may be just one step away from complete financial disaster.
Retirement Savings
Ask yourself: Am I saving enough for retirement? If you have a retirement plan at work, such as a 401k plan, at least strive to save enough to get the full match from your employer.
If you don’t have a plan at work, open an IRA account and aim to contribute at least 10% to 15% of your salary. You don’t need an employer’s benefits package to open an IRA account, which is why many self-employed individuals and people with jobs without benefits choose to open IRA accounts.
Before you buy a home, make sure you’re saving at least 10%, or 15% at best, for retirement.
Your Budget
Look at your budget – can you afford to buy a home, or upgrade from your current one? As a general rule, your housing expenses, including utilities, should not exceed 35% of your total income, according to the 50/30/20 budgeting rule.
In other words, if you earn $2,000 a month, your housing expenses should be no more than $700. If you earn $4,000 a month, your housing expenses should be no more than $1,400.
Remember, you won’t just be paying the mortgage payment. As a homeowner, you will incur additional costs like repairs, maintenance, and renovations. Set aside enough money for this purpose. The total of all these housing-related expenses should not exceed one dollar for every three dollars you earn.
You will need the rest of your money for other purchases, such as groceries, in addition to savings. Your total essential purchases – including your mortgage, utilities, gas, groceries, car payments, and insurance premiums – should not exceed 50% of your income, according to Elizabeth Warren’s 50-30-20 budget plan.
This plan also states that you should save at least 20% of your income, putting aside at least 10% to 15% in retirement accounts, with the remaining 5% to 10% in a savings account until you have an adequate emergency fund. After that, put the remaining 5% to 10% into a savings fund for college, a home repair fund, or savings for big-ticket items, or invest the money.
Do you
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Sources:
U.S. Department of Veterans Affairs. “Types of Mortgages from the Department of Veterans Affairs (VA).”
Ramsey Solutions. “How Much Rent Can I Afford?”
Internal Revenue Service. “Retirement Plans for Self-Employed Individuals.”
Source: https://www.thebalancemoney.com/are-you-financially-ready-to-buy-a-home-453829
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