If you don’t honestly assess your financial health before buying a home, this major purchase can stunt your ability to build wealth.
In order to make a good decision on buying a home, understand how this property will fit into your current financial reality and the effect it will have on your future by asking yourself these three questions first.
What’s Your Backup Plan If Your Income Disappears?
Most mortgage lenders require you to have at least 2 years’ worth of work history to prove your chances of repaying the loan. It will be very challenging to go through the mortgage process if you don’t produce regular income, but you should also consider whether or not that money will continue to be stable for the next five years.
If you’ve had trouble finding a new job in the past, or you are noticing layoffs in your industry or company, it may benefit you to wait.
Regardless of the stability of your job, owning a home requires a much larger emergency fund than if you’re just renting. Your monthly rent payment represents the likely maximum you’ll have to pay for home expenses, but your mortgage is the minimum because other maintenance items can easily arise.
In addition to the savings you have for purchasing the home, you’ll want to ensure you have at least three months of expenses saved, based on your new home budget before you buy.
That way, if you lose your income, you still have 90 days to figure out your next plan without falling behind on mortgage payments.
Did You Save At Least $1,000 Per Room To Decorate?
As a financial coach, I’ve witnessed so many students get caught in the frenzy of buying a home, they forget it will cost them money to furnish the space once they own it.
According to Forbes Home, the average cost to decorate a typical home is about $5,000. If you’re hiring a designer, most interior design projects will have a total cost between $1,500 to $12,000, not including furniture costs.
They also tend to overestimate how well their old furniture will fit the new space, and underestimate how costs for seemingly small cosmetic changes like paint, hardware and fixtures can add up quickly.
A $1,000 budget per room is actually a pretty conservative estimate, considering the cost of a quality couch or bed alone would be at least $1,000.
When we downsized from our house to a condo with two bedrooms, a living room, a dining room and a kitchen, we allocated $5,000 on top of our emergency fund and our 20% down payment.
Is The American Dream Your Dream, Too?
Bankrate’s recent Financial Security survey reported 74% of Americans consider homeownership to be of higher value than any other economic stability measure, including a comfortable retirement, a successful career, having children and holding a college degree.
I grew up in New York City, lived in a townhome, and I never thought that I would have a single-family home. So, when I moved to Charlotte, North Carolina, I was desperate to tap into the relatively affordable real estate. I wanted to show my friends and family that I had made it.
But just because you can afford to buy a home doesn’t necessarily mean you have to buy one. You can a have fulfilling, wealth-building adult life without owning a home. For some, the financial, mental or emotional price of homeownership is too high.
Take a moment to make sure homeownership is really part of your dream — and not just an expectation society has picked for you without getting to know you first.
Write down all the reasons you want to buy a home. Throw logic out the window for a couple of minutes and let your heart and gut drive this list.
When you begin the homebuying process, you’ll be inundated with so many options and opinions, it will be difficult to remember what the most important things are. When that happens, refer back to this list of reasons and let those priorities drive your decision-making.
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