Becoming a homeowner is the American dream right? Unfortunately, too many people rush into this dream – only to find themselves in financial despair and facing foreclosure. This could’ve easily happened to me.
After getting divorced a year ago, I thought about purchasing a home of my own. I was working two jobs and sharing a bedroom at my dad’s house with my two daughters. I was desperate to be out on my own again.
To keep a long story short, I did make a few offers on houses. Unfortunately, all of the offers fell through for one reason or another. After this disappointment, I smartened up and decided to wait until I was financially stable to buy my own home. Instead of thinking about houses, I focused on keeping my expenses low and my savings high. I took out a small loan and bought a trailer to live in.
I’ve now realized how important it is to have your ducks in a row before even thinking about homeownership.
Here are three ways to financially prepare for future home ownership:
1. Create an Emergency Fund
I’m big on emergency funds. A few months ago, I went from working two jobs to one. My take-home pay was barely covering my bills and I had to dip into my emergency fund a few times just to get by.
Now that my income is picking up again, I’m replenishing my emergency fund and working to get $12,000 saved. This will cover just over six months of my normal expenses.
2. Banish Debt
I’m lucky to have never gotten myself deep into debt. While I did rack up a couple of thousand dollars in credit card debt when I was younger, it was quickly paid off.
I did, however, take out a $10,000 loan to purchase the trailer I’m living in now. The interest rate is super low, and I’m paying $226 per month with a four-year term. Right now, I just look at this as a living expense similar to rent or mortgage payments. But, before I purchase my own home, this debt will have to be gone.
3. Amass a Big Down Payment
In terms of finances, I now prefer comfort over minimal. So, I’d like to have around a 50% down payment when I purchase a home.
As I leap more into freelancing, my income is variable – and that’s kind of scary. I’d rather be safe than sorry. Luckily, housing in rural Ohio is still cheap. While 50% might sound like a lot to you, I can probably find a pretty decent house for around $120,000.
It will take some time to save up the 50%, but it’s well worth the wait.
Conclusion
In an uncertain economy, it’s smart to be extra careful with your home-buying decisions. If you can delay your house shopping until you’ve created a solid foundation for yourself, you’ll be able to avoid financial hardships and feel confident about your decisions.
While the exact numbers differ by person, creating an emergency fund, paying off debt, and saving a big down payment should be goals for most people before they decide to buy a house.
Any other preparations you’d add to this list?
{ read the comments below or add one }
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I found this advice to be helpful, despite the fact that I am in the process of purchasing my third home, not my first. Being prepared is what it is all about. Thanks for that reminder!
These are really important points that you make. I have an affinity for watching way too much HGTV and to see so many throw caution – and pre-set budgets – to the wind when buying a home scares me! Having a large down payment and emergency fund (since something in a home will always need repairing) is a very smart way to go!
Be realistic about what you want. If you buy a fixer-upper, have the money to fix it up already stashed away when you buy the home. There are a few people who really can pay as they go, but most people (including me, my brother, my friends) all ended up in debt on a Home Depot card or whatever because those projects couldn’t wait. I wouldn’t pay $20,000 more for a house that had everything finished, and by the time I got mine to the same level, I probably spent double that. Also, have a list of things that you like and stick to it! I worship sunlight and bought a tri-level with a garden level den. Not one window faced south. And finally, do NOT feel pressured to buy a particular home because you feel bad that your agent has shown you 10 houses. The last two aren’t necessarily prep issues, but if you ignore those elements, your decision will end up costing you. I think that most people regret their first home purchase and consider it a learning experience. Don’t do it.
We’re fixing up (and paying) as we go and so far so good! Even if you plan to do that (and actually can) you should still save a stockpile for the essential repairs you need to do right away. If you don’t have any of those, save anyway, because chances are you’ll find a few shortly. Also, stash even more cash for all the stuff you suddenly need – lawnmower, snowblower, shovel, garden tools, storage stuff, paint, etc.
We’re coming around to the end of our first year in our first house and it’s starting to feel like we have some breathing room. There’s plenty more to do, but it’s possible to hit the pause button here and there when we want to. Currently planning on a nice low key fall and winter before tackling a huge restoration project on the original 1830’s house next year.
Good advice! I’d like to add: use a low-commission realtor. I did that both when I sold my previous condo, and when I bought the house I currently live in. I used Redfin, which is only in limited cities in the US, but you can also find independent agents who will give you a reduction in the fee they usually charge. You can save thousands of dollars, all of which you can roll back into the down payment.
Best advice! I got much information from this site about buying a home and also got to know about its profit or loss. We can save thousands of dollars through. I totally agree with the first point ‘Create an Emergency Fund’, we should definitely have a fund ready for the emergency.
Great advice, but a 50% down payment isn’t realistic in some areas. Real estate here in NJ is much more expensive than Ohio!
I could not agree more on the EF. You never know what’ll happen and it generally isn’t cheap when it comes to a house.
Definitely have an emergency fund. Houses need repairs and an EF will help you be more prepared!
Alexa these are excellent points. Saving to establish an emergency fund is imperative but very few can achieve this goal. Nowadays, the decision to rent versus buying is a very close one. Also, putting a lot down can sometimes backfire. I had a relative who put a lot down for a new home in a development where after a couple of years the house was underwater. Her down payment may never be recovered. So you need to be very careful here.
I would just put down enough down payment to ensure i got my mortgage at a decent rate.
Then anything else would be staying in my emergency fund or earning interest elsewhere at a higher rate.
Inflation is a home owners best friend.