My wife and I have been talking about buying our first home for years now; heck, I’ve been writing about it for years. I know it’s not always the best decision when it comes to running the numbers, but for us, it is. While we have been aggressively saving our down payment for our first home, a few recent events have led me to think about when it’s appropriate to buy your first home. Here’s what I’ve decided.
You Should Meet these Qualifications before Buying a Home
There are a number of indicators that can help you determine if you are ready to buy your first home.
This one is VERY important–not only because lenders will require it (assuming you are going to get a mortgage), but also because having a job is going allows you the stability and/or assurance to pay your monthly payment each and every time. If you want to stay in your home long-term, you will have to pay the bills.
With Mrs. 20s currently out of long-term work, we are holding off on buying a home. She’s currently working as a contractor, there are no long-term guarantees while working as a contractor and we don’t want to put ourselves in a bad situation – even if we could pay the mortgage with my paycheck.
Down Payment Saved
As I mentioned, we’re currently waiting on Mrs. 20s to get a job as an employee with a little more job security, but we are also saving up our down payment. There are a number of ways to save a down payment. Regardless of where you get money to put down, the fact is that you need money to put down to buy a house.
Mrs. 20s and I are going about it the conventional way. We are saving all of our extra money in an online savings account and letting interest and our aggressive savings rate do all the work. We’ve made great progress so far and depending on the lending source, we probably have enough money to put down now – it’s just a matter of whether we’d be required to pay mortgage insurance or not. I’d love to avoid it, but it won’t be the end of the world if we have to pay mortgage insurance for a year or two.
It pains me when I see young adults avoiding credit cards completely because everyone has told them that they are bad. The truth is that credit cards are not the problem – it’s the people using them. If you want to buy a home, you need to have a good credit score. This means that you need to use credit in small amounts to show people that you are responsible. A good credit score means not only that you will be accepted for a mortgage, but also a chance of getting the best interest rate; which equates to more money in your pocket.
What often happens when people buy a home (and what I’ve been tempted to do recently) is to combine the down payment with the emergency fund – or worse, use the emergency fund as the down payment. Whatever the excuse, people are tempted to combine the two, when in reality, an emergency fund is that much more important.
While you may not have a lot of expenses after you buy a home (there are some: moving, new furniture, etc.), you never know when an emergency could hit. Whether your car breaks down or there’s something wrong with the new home, you don’t want to be strapped for cash. While you may be able to get away with using part of your emergency fund, I recommend keeping at least 3 months of expenses in cash – just in case. Then again, if you use a Roth IRA, you could also get by with using that as an emergency fund since you can withdraw the contributions at anytime.