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How Do You Know When You’re Ready To Buy A Home?


How do you know you're ready to buy a home? When you have the money, a steady job, and the desire to be a homeowner.Sibling rivalry doesn’t end at childhood; just ask my sister.

Amber bought her home at 25 years old, almost immediately after I purchased my house. She couldn’t let her baby brother be the only homeowner in the family. After all, owning a home is the American dream, isn’t it? My sister proudly moved into her house and quickly filled it with more Ikea furniture than a Swedish hostel and the painted the rooms in all the latest colors, just like on some HGTV show.

Then the water pump broke.

Followed by a shower handle.

And then the snow began to fall on her pristine driveway, making it impossible to get to work one morning.

And this was all in the first few weeks of owning a home.

Living across the country, there was little I could do to help. My parents did the best they could to assist, but over the next two years my sister spent more time trying to fix problems than actually enjoying her home. Meanwhile, in those two years I picked up a half-dozen rental homes and even a large apartment complex and found my true calling as a real estate investor. Clearly, owning real estate was working out great for me, yet to my sister it had become an enormous headache.

I’ll share with you later just what happened to my sister and her house. For now, however, I just wanted to tell this story to illustrate an point: Just because you can buy a house, doesn’t mean you should. Buying your first home can be a great step in climbing the mountain to financial security or it could be a cannonball into the river of debt and despair.

So how do you know when it’s right time to buy a house?

I’ll tell you the secret: It’s not about “when” but “who.” Who are you? What is your position in life? These are the questions that will determine when you should venture into home ownership. It’s not about an age you need to reach first. It’s about a person you need to become before buying a home. Although I bought my first home at 21, others might wait until 41. Others may rent for life, and that’s fine. There’s nothing wrong with renting.

Owning a home does have advantages for building wealth in life, but I advocate asking yourself these five questions before choosing to buy a home. If you can’t answer yes to each of these questions, put off buying a house. 

1: Is Your Financial House In Order?

  • How much credit card debt do you have?
  • How about auto loans, student loans, or personal loans?

No, you don’t need to tell me. You can lie to me and to others all you want, but you cannot lie to yourself (or the bank) if you want to buy a home. I’m not saying that you can not have any debt in order to buy a home, but I believe debt is the symptom of a greater sickness. “But Brandon,” you say “I only have that debt because of (insert financial difficulty here).”

Exactly.

That debt is a symptom of a greater problem: not enough money. If you are force to use a credit card because there seems to always be more month than money, do not buy a house.

How about your credit? Are you rocking a 820 credit score or scraping by with a 620? Your credit score is the number a bank uses to determine how well you handle credit. If your credit score is terrible, it’s probably because you handle credit terribly. Yes, there are circumstances beyond your control that could affect your credit score (such as fraud or medical bills) but even so these issues need to be cleaned up before you begin shopping for a home.

2: Have You Saved Enough For A Down Payment?

Your down payment on your first home will most likely be the single largest investment you’ve ever made. I’m not just talking about the down payment you’ll need to finance the home, but also all the unforeseen costs that are associated with your acquisition.

As you probably know, today you can buy a home for as little as 3.5 percent down payment. On a $200,000 home that’s just $7,000. Many people look at that and say, “Well great! I happen to have saved just that much money!”

But don’t forget the closing costs, insurance, taxes, and money for repairs and furnishings to turn the house to a livable home. These costs will easily add thousands of dollars to your bottom line.

There’s not much worse than buying your dream home and not having a cent to fix it up to fulfill your dream. You may be stuck with plain white walls or an olive green bath tub for longer than you want. If, however, you can afford a down payment that allows room for breathing (and upgrades) after the purchase, you are on the right track to home ownership.

3: Can You Really Afford The Payment?

When it comes to your monthly mortgage payment, can you really own for the same amount as you can rent?

Most real estate agents will enthusiastically tell you”yes!”

In truth, the amount you pay in rent probably would be similar to the amount you would pay in principle and interest on your mortgage loan. However, your principle and interest are not the only costs associated with owning. Don’t forget about:

  • Property taxes
  • Insurance
  • HOA (homeowner’s association) fees
  • City assessments
  • Water, sewer and/or garbage
  • Other utilities your landlord may cover

These charges will  add hundreds to your monthly payment. On one of my duplexes, my tax and insurance payment is more than double the mortgage principle and interest!

Be cautious about simply using an online mortgage calculator to decide how much it would cost to own a home. The mortgage payment alone is only one piece of the puzzle. You must determine a reasonable amount that you can afford before you shop for your home. 

Only you know your personal budget and what you can afford, but I recommend never taking a monthly payment that is more than 25 percent of your take-home pay…and that includes your taxes and insurance. Most lenders will allow you to stretch yourself significantly thinner than that, but don’t fall for their temptation. The worst financial crisis to hit our economy since the great depression was triggered by these same loose lending criteria.

4: Are You Ready To Settle Down?

How many job changes have you had in your life? If you are like me, probably several. Until you find that one career you plan on keeping for a while you may find that your next job may create a two hour commute or, worse, lead you to another city or state.

Unless you are in the flipping business, your home is a long term investment. Home prices, on average, appreciate around three percent per year. In other words, if you buy a home and sell it within a year or two, there’s a chance that the increased value (if any) won’t even cover the closing costs you paid to buy the house. K

I recommend planning on staying in your home for at least five years. If you aren’t ready to commit to that length of time yet, it’s okay. Just don’t jump on the “I need to buy a house because everyone else is” bandwagon.

Yes, you can always rent your home out if you were to move out of the area. In fact, I’m a believer in turning prior homes into rentals; it’s how I got started investing in real estate. It takes work to be a landlord, however, and you should know what you’re getting into before diving into real estate investing. 

5: Can You Fix a Leak?

When you become a home owner, you have to be able to fix your own problems. It’s perhaps the biggest difference from being a renter.

You can’t simply call the apartment office or landlord to have them fix a leaky sink or broken dishwasher. When you are the owner, you need to have either:

  • the ability to fix problems yourself or
  • the resources to pay others to fix them.

If you can fix things yourself, you can save on the labor but the material costs can still wreck havoc on your savings. A new dishwasher isn’t cheap. These little surprises are a part of home ownership, and you should be prepared for them both financially and psychologically.

So, Are You Ready To Buy?

Did you answer “yes” to each of these five questions?

  1. Are your debts and credit score in order?
  2. Have you saved a down payment and money for furnishings, moving, and upgrades?
  3. Can you comfortably afford your new monthly payment?
  4. Are you ready to settle down?
  5. Can you fix a leak?

If so, I fully encourage you to pursue buying a home if you desire to. Although this article may come across  a bit against home ownership, I am a full believer of buying a home (and more than one) as soon as you are ready. Buying a home can be a terrific investment, especially if you buy when prices are “on sale” like they are in today’s market. Of course, no investment is guaranteed.

If you were not able to answer yes to these five questions – that’s okay!  Owning a home is like having children: they may be blessings, but that doesn’t mean you need to rush into it (both homes and kids can get expensive!)

Buying a home is a big decision. As I mentioned earlier, buying a home is not so much about “when” as it is “who.” Only you know truly who you are, what you can afford and what you can’t.

As for my sister and her difficulty as a homeowner, she finally decided that owning was not for her. She sold her house just last month and decided to venture back into renting, and I am proud of her for doing so. She was fortunate to get out of her home without losing money (she broke even), but others haven’t been so fortunate. Don’t make the same mistake. Be prepared, do your homework, buy when you are ready, and–of course–don’t let sibling rivalry influence your decision.

Brandon Turner is a real estate investor, consultant, blogger, and author of “7 Years to 7 Figure Wealth,” a guide to using real estate to fire your boss, fund your adventures, and secure your future. Learn more about Brandon and get his book for free at www.RealEstateInYourTwenties.com. 

Photo by stevendpolo.

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Comments

  1. Great post, Brandon! My husband and I have been seriously considering buying a home this year, but finally decided we wanted to spend another year or two paying down our student loans and saving for a larger down payment. It is true that you can purchase a home for as little as 3.5 percent down, which is very tempting, but if you put anything less than 20 percent down, you can end up paying private mortgage insurance, which ups your monthly payment even more.

    I’m curious to hear your thoughts on purchasing a home while finishing off paying other debts. Some people would advise potential buyers to pay off all other debts first, while others say having a reasonable amount of debt is key, as opposed to hitting zero on car payments, student loans, etc.

    • Thanks Denise! I think it is wise to either pay down the debt, have some good solid savings, or just make a really good income before buying. I didn’t have a lot of savings or income when I bought, but I had very little debt. And yeah, PMI sucks. Avoid it if possible!

  2. Great post! My husband and I almost bought a house 3.5 years ago, but our financials were so fragile that when an unexpected accident happened the day before we had our inspection, we could no longer afford to buy it.

    Now we’re renting a house and in a much better place financially. Our landlord is one that expects us to take care of basic home maintenance (air filters, moving the lawn, painting, minor cosmetic repairs, etc), which is giving us a trial run at homeownership with the security of knowing those “major” things aren’t something we’ll have to foot the bill for yet!

    We’re planning on saving up a nice big down payment while in this home. For those not quite ready to make the leap, I definitely recommend checking out rental houses that will allow you a little more of the flexibility of homeownership! It’s been a great learning experience for us!

    • Thanks Emily! Good call on waiting to buy. This market where everything seems to be “on sale” will be around for some time, so don’t feel bad about waiting! You’ll do great in life because you know the value of being smart with your decision making. Lots of people don’t!

  3. Sounds like your sister had to go through a lot of trouble. Most people who can afford the downpayment forget to do a reality check as to whether or not they can make the monthly payments. For most people, a lost job means that they can’t even pay next month’s mortgage payment.

  4. My goal is to save up roughly 30% of the cost of a home. I want to put 20% down and then have 10% for costs and to have cash on hand for furniture and miscellaneous expenses. I think too many people focus on the 20% down, then run go by a house and find their bank account empty for several months. That leaves them open to falling into debt if something happens.

  5. Brandon,

    You are a busy man these days ;)

    I admire your ambition. Thanks for rolling all of this great content up in today’s article. This is definitely a great time to lock those amazing rates and get deep into healthy government sponsored debt.

    Keep up the great posts.

    best,

    Arthur

  6. When purchasing furniture, it is important to remember that you don’t need to have the finest leather couch or newest recliner. If you plan on having children, they will likely destroy your furniture anyway.

    I recently purchased a home and told the previous owner to leave anything they didn’t want. I was planning to either use it or sell it in the classifieds. I received a dining room set, couch and love seat for free. It wasn’t the highest quality, but it was free.

    You don’t need a riding lawn mower either. A push mower is about $150 and will last you 5-7 years.

    Remember that it is ok to have sub par possessions when you are in your twenties.

  7. Great post, yes so many people rush into things without having all the resources to do so. People ask me all the time should I buy a home and 90 % of them have not even saved for the 20% in down payment. I tell hold them off until you can save that and 2-3 months of reserve funds.

  8. This post hit home as we are just starting the process of buying our first home. To be honest, a big part of it is I want to lock in that low interest rate and buy “near” the bottom. We may have to move eventually but like you mentioned above, renting would be the way we go. I know a lot of young adults who would be interested and we are buying in areas that we both love and would be attractive to renters (i.e. we aren’t really looking at the suburbs).

    I also think the 20% down payment isn’t necessary, but my home state (Minnesota) rolled out a program where you can essentially get a loan without PMI with just 3.5% down. It’s only been available for a few months, but it’s definitely attractive. With the mortgage payment, taxes, and insurance combined it’s about the same as what we pay renting. Obviously we would also want to set aside some $ each month for repairs, which is what we plan on doing.

    I think there are a number of people who would tell us not to buy, but my mind is pretty much made up.