Looking to Buy a Home? First, Check Off These Milestones
Buying a home for the first time is exciting. So much so, that the anticipation of homeownership often overshadows the preparation, leaving many new buyers vulnerable to the realities of owning a home. If you do not have your ducks in a row before you close on your home, then the dream of homeownership could turn into a financial nightmare.
If you are considering buying a home, first make sure you’ve checked off as many of these financial milestones as possible, so that you can be sure you’re ready for the responsibility of homeownership.
Pay Off Your Consumer Debt
Unless you’re paying cash for your home, you’re about to take on a significant amount of debt. It’s in your best interest to eliminate your current debt load before adding to it.
While you can certainly qualify for a mortgage with consumer debt, buying a home when you’re saddled with other payments will only overwhelm you.
Have a Fully-Funded Emergency Fund
Everyone needs an emergency fund—homeowner or not. But as a homeowner, it is even more critical, since you will have a whole new category of potential “oopsies” to cover.
If your pipes freeze over in the winter or you need to take down a tree in your yard, there's no landlord to call. It’s all on you, and if you’re not adequately prepared for emergencies related to your home, this can lead to taking on debt to cover them—or the deterioration of your home, should you delay or ignore necessary repairs. If you think a frozen pipe is costly to deal with, just wait and see what happens if that pipe bursts and floods your home.
Having a fully-funded emergency fund of at least three to six months will not only protect you, but it will also give you peace of mind.
Save Up Your Down Payment
Coming up with the down payment on a home can be a significant hurdle to homeownership. Many new buyers overcome that obstacle by putting little-to-no money down.
It’s tempting to take that path, as it brings homeownership within reach far faster than waiting to have the recommended 20 percent. But doing so puts you at risk.
Entering homeownership with little or no equity could potentially lead to your home being foreclosed on if you get overwhelmed by the high payments. And even if you manage to keep up with the mortgage payments, you will still need to pay Private Mortgage Insurance (PMI), which means money that could be going towards your principal and interest is going towards fees.
Prove your readiness by taking the time to save up for the down payment—if not the full 20 percent of the purchase price, then as much as you can.
The costs of owning a home extend far beyond the mortgage payment—which catches many new buyers by surprise.
During the mortgage process, expect to cover the costs of the home appraisal, home inspection, termite inspection, loan origination fees, and of course, closing costs, which can amount to approximately two to four percent of the home price.
Also, be prepared for the expense of moving, furnishing your home, and taking care of any work necessary to move in. Once you’re in the home, you will need to cover routine maintenance, repairs, and possible HOA dues.
Additionally, your insurance needs may go beyond the required homeowners insurance should you choose to purchase an umbrella or liability policy.
Create Room in Your Budget
It’s common to overestimate your ability to afford a mortgage payment. On paper, it may seem doable, but reality may tell a different story. Figuring out your estimated payment using a mortgage calculator is a great start, but why not go a step further?
Take your expected mortgage payment for a test run by making it a part of your budget now. For several months, act as if you are paying the estimated mortgage along with some of the monthly expenses you will incur. Doing this will let you experience the new payment along with the realities of life that a calculator just cannot simulate. As an added bonus, the extra money you’re setting aside can go towards padding your emergency fund, establishing a fund for home maintenance, or just saving more toward your down payment.