Over the past month, I have started to get ready for a big upcoming move. In fact, one of the most significant moves in my life. While not the largest (I drove 37 hours to go to college across the country) and then moved a number of states away after graduating and getting married to bring us to New Jersey. Both of those moves were significant, but in no way permanent. While I don’t know for sure that my wife and I will be living in Boston long-term, we have every intention of not moving every couple of years.
It’s time for us to settle down.
A part of getting ready for the big move has been creating lists of things to do before, during, and after the move. I’m the type of person who prepares for something months in advance because I know these type of moments are stressful. The more I can do now to prepare, the easier it will go. One of the things that I have been considering is buying our first home. Not a single family home, but a condo. Not only would this mean less hands-on maintenance, but it would also be more affordable. While my wife and I are doing okay financially, we’re far from great and I can’t help but question if we are financially ready to be home owners.
When Are You Financially Able to be a Home Owner?
I’m sure everyone has their own metric to determine if and when they are ready to pull the plug and buy a place of their own. Some people may ignore the numbers and buy solely on emotion, but for those of us who do consider the numbers, what’s your magic formula? Here are some things that I have been using, but I’d love your feedback:
Able to Cover the Mortgage Payment
This is an absolute necessity. If you cannot afford to pay the monthly payment on a projected mortgage, there is no reason to be shopping for a home. I have been looking at places to rent and buy and if we have enough for a 20% down payment, it is remarkably cheaper to buy a two or three bedroom condo than it is to rent. I’m not sure why that is, but it’s at least $300 difference without factoring in the quality or size of living space (this includes insurance and taxes). This makes me want to buy even more, but I’m not convinced this should be the only financial criterion.
You Have Enough for a Down Payment
Another bare necessity is having enough for a down payment. This amount will vary depending on the value of the home and details of your loan, but it’s common sense that you have to be able to put some money down. We’re looking to put at least 20% down to avoid PMI in our monthly payment. We don’t have this money yet, but maybe in 1-2 more years. A guy can hope at least.
Beyond the basics (down payment and ability to pay the mortgage each month), I personally believe that people should have an additional financial cushion set aside for maintenance expenses. Seeing as I don’t know how much maintenance costs, I would guess that a reasonable person would have an extra 5% in savings to be able to pay for necessary maintenance on the house. The last thing you want is to not be able to pay for a new hot water heater or other large appliance. I’m sure there are plenty of people who jump into home ownership without this cushion, but the last thing I want is to be put in a situation where I have to go into debt to pay for an expense that I should have seen coming.
Money for Moving and Closing Costs
The last thing on my list is to have some money for movers and enough extra money to pay for closing costs. Depending on whether you have friends and family in the area, you may be able to move yourself, with the small expense of renting a truck. But if not, you could be looking at anywhere from $500 to a couple thousand dollars depending on the amount of stuff that you’ve collected.
Considering all of these factors, my criterion for being financially ready to buy a home is the following:
- Being able to pay the mortgage payment
- Having 20-30% of the home value in cash
Because I don’t want to get in over my head and let emotions take the best of me, I know that we’re not ready to buy just yet – even if the lower mortgage, taxes, and insurance are lower than the going rate to rent the same or smaller apartments. It is kind of disappointing, but I guess the best things in life are worth waiting for, right? Or maybe that’s just what people say when they are bummed about having to wait for something.
Readers, what was or is your criteria for deciding whether you are ready to buy or not? Did you buy a home before you should have? What happened?