3 Questions To Ask Before You Buy a House, According to George Kamel
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Andrea Norris
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Jenna Klaverweiden
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For those who are considering making the move from renter to homeowner, Ramsey Solutions money expert George Kamel recommended first asking a few key questions to determine whether you’re financially ready. Homeownership can be a lucrative investment, but it’s also a considerable long-term commitment that can strain your finances if your budget can’t accommodate its many associated costs.
If you can’t answer “yes” to the following three questions, consider getting your financial house in order before buying a home.
Are You Consumer Debt-Free?
“If you try buying a house while you have debt, it’ll be tough to save up a strong down payment since most of your extra money will be going out the door to credit card companies or Sallie Mae,” per Ramsey Solutions. But saving for a down payment isn’t the only homebuying benefit of knocking out consumer debt.
First, you may find it challenging to qualify for a mortgage with some lenders if you have a high debt-to-income ratio — how much you owe vs. how much you earn.
Second, paying off your consumer debt will likely improve your credit score. A high credit score improves eligibility for the best mortgage rates. Even though housing prices and mortgage rates are starting to ease, both are still high. Getting the lowest possible mortgage rate means you will save more over the life of your mortgage or until you can refinance.
Do You Have an Emergency Fund?
When you rent, your landlord covers the cost when your furnace breaks, your roof leaks, or some other repair or maintenance is required. These costs fall to you as a homeowner. An emergency fund can help you avoid taking on debt to cover these expenses.
If you want to reserve your emergency fund for other types of financial surprises, such as job loss or medical expenses, consider creating a fund specifically for home maintenance and repairs. Experts recommend setting aside a minimum of 1% and as much as 4% of your home’s value each month to cover the costs associated with your home’s upkeep.
How much you contribute to a maintenance fund each month may depend on a variety of factors, like the age of your home, appliances, roof, and systems such as heating, cooling and plumbing.
Do You Have the Reserves To Put Down on a House?
The bigger your down payment on a home, the less you need to finance. This can mean a lower, more manageable monthly payment. It may also save you from private mortgage insurance (PMI) costs.
Lenders require PMI if you finance more than 80% of a home’s value. It protects the lender if you default on your mortgage. PMI increases your monthly mortgage payment by about $30 to $70 for every $100,000 you finance, and you must pay it until you owe less than 80% of the home’s value.
First-time homebuyers should have at least a 5% to 10% down payment, per Ramsey Solutions, but 20% is even better if possible. If you can save 20%, you’ll have a lower mortgage payment from the start.
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