Everyone dreams of owning a home. Maybe your dream home has the perfect white picket fence or a beautiful red door. No matter what your dream home looks like, it’s not always clear whether you’re financially ready for this big step. Buying a home is one of the biggest financial decisions you’ll ever make, so that means you need to take it seriously by asking the right questions. Before you talk to a real estate agent, ask yourself these questions to make sure you’re financially ready to buy a home!
Are You Debt Free (or Close)?
Owning a home is a big financial responsibility. If you already have other financial commitments like excessive debt, you might not be in a position to add another debt to your plate. Owning a home brings along a stream of other financial stresses that you might not be able to anticipate. To ensure you’re in the best position to take this plunge, you need to be actively paying down your debt. If you aren’t debt-free, make sure you’ve created a realistic plan for paying off your debt quickly and effectively. Realize you will need to have a flexible plan to make room for additional home-related payments.
Do You Have an Emergency Fund?
A lot of new home buyers make the mistake of skipping their emergency fund. Just because you’re debt-free doesn’t mean you’re ready to purchase a home. You should have an emergency fund with enough money to last you at least three months of expenses if you should need it. One of the biggest reasons people fall into debt is because they fail to have an emergency fund. There are a lot of unexpected expenses that come along with owning a home! You don’t want to be caught without an emergency fund!
Are You Prepared for a Down Payment?
While we all wish we could pay 100% cash for our homes, that usually isn’t the case. You should be able to pay at least 10% down on your home upfront. The more you can pay upfront, the better. If you’re able to put down 20% (or more!), you will avoid having to pay private mortgage insurance (PMI). Down payment assistance might be a good option in some instances to avoid PMI costs. When choosing a mortgage, be realistic. Your payments monthly should be at around 25% of your monthly income to avoid running into financial trouble.
Can You Pay the Closing Costs?
Paying for a home involves more than just your down payment and moving costs. You also need to feel comfortable paying your closing costs. These generally run between 2% and 5% depending on the bank, seller, and price of the home. These closing costs cover everything from home inspection fees to property taxes. It’s hard to anticipate these closing costs until you’ve already received a loan estimate from your mortgage lender.
Are You Prepared for Unexpected Costs?
Unexpected costs are a natural part of the home buying process. In a best-case scenario, these costs will be limited to moving costs like buying bubble wrap or moving supplies. In some instances, they’re more costly with things like expensive home repairs, in-home upgrades, or utility deposits. As a homeowner, you need to be prepared to financially cover these costs even after paying all the fees associated with the initial purchase of your home.
Buying a Home
Buying a home is a big decision, and it’s not something you want to rush into. You should buy a home because you feel ready for this financial step, not because of outside influences. Review the questions above carefully. Buying a home is less about your personal feelings and more about the reality of your financial health. If you have enough savings and you’re ready for this next step, buying a home might be right for you!