Most of us would probably buy at least one house during our lifetime. For some, buying a home is a dream; for some, it is a definition of their success in society; for some, it is simply a shelter where they don’t have to pay rent.
No matter the justification, when a person starts to think about buying a home, it is prudent to conduct a self-evaluation to see if they are financially ready to get their feet wet in home ownership. This post looks at some of the key aspects that may be worth considering before taking the leap.
If a person is riding the debt wave well by having outstanding credit card bills at the end of the month, then the time to buy a home may not have arrived yet. Simply being able to make the minimum payments on credit cards or paying all balances in full at the end of the month with no money left over does not mean that finances are close to being in order. Contemplating to buy a home involves more groundwork than simply replacing the rent payment with a mortgage payment. If credit is funding regular fixed expenses (groceries, Internet, phone, etc.), then all is not well.
Absence of an Emergency Fund
Whether the emergency fund lasts for 6 months or more depends on the individual’s situation and comfort level but the lack of a substantial emergency fund is a big red flag for a future homeowner.
Such a fund is critical to cover unexpected maintenance work in the new home, job loss, illness, etc. The essence of keeping financial reserves is to avoid missing mortgage payments, at least for a few months, due to certain incidents and/or accidents. In the event of other mishaps like a broken appliance, inability to purchase a replacement could lead to hassle and discord among family members.
Stability of Income
People who have not held a job for a while (say, at least a year) are better off refraining from house-shopping. Conventionally, once a young adult gets a good job after college, s/he is ready to buy a house soon after, especially if there is no other debt.
Even if the person graduated without any student loans, their spending habits determine the readiness. Living paycheck-to-paycheck despite the absence of any loan payments means that there are certain basic finance lessons such as “spend less than you learn” (or “earn more than you spend”) that need to be imbibed before thinking about buying a home. Evidently, not buying too much home is critical.
Knowing the credit score is a primary step before approaching lenders, as maintaining a good score is essential to obtain a low interest rate on a mortgage or any other loan. Keeping debt levels low, while not missing monthly payments on the amounts owed will go a long way toward maintaining, if not improving, a good credit report.
Home Ownership Costs
Some tenants have a single payment in the form of rent, while others may pay a separate amount for utilities. But, a home owner may have to include property taxes, maintenance expenses, utility bills, insurance payments, and probably Home Owners’ Association (HOA) fees in their budget to evaluate their readiness.
Evidently having the skills, interest, and time to fix problems in a new home will save money that could have been shelled out to repair companies. Being handy by nature would help but having the time and willingness to learn are big money-savers.
Can you think of other aspects that one would have to evaluate before committing to buy a home? Did you repent for not thinking it through before buying a home? Any stories that could be shared?
About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.