Purchasing a home isn't just a financial decision. A home is your greatest emotional anchor, which means your emotions are a part of the buying process. This will be your greatest obstacle to making a smart home buying decision. Homeownership has become a status symbol and the definition of success in our society. And sure, homeownership is great, but poor home-buying decisions are nothing to celebrate.
Deciding to continue to rent or to move forward with the home buying process is a simple one. You can either afford to make the purchase or you can't. There are three simple questions to ask yourself to determine if you are ready to make the big leap to homeownership...
You can't make it through adulthood without encountering at least one person who is saving up for a down payment. It's a part of life for most adults. Saving up 10% of the value of the home and using it as a down payment is a huge step for many adults. Yes, it's true you don't have to have 10% to put down in order to purchase a home. And yes, it's true if you put down 20% you won't have to pay PMI (private mortgage insurance). But, focusing on 10% is a good goal for anyone.
If you can do better, great! But here's why 10% is the magic number: if you can manage to scrape together 10% of the value of your future home without tapping into emergency savings, you can afford to be a homeowner. Saving 10% of the value of the home you want from scratch shows dedication, discipline and a concrete ability to curb spending. All qualities required of a homeowner.
It's easy to listen to everything the bank tells you, because they are generally "the authority" on money matters, but in this instance, the bank isn't always right. Banks have been known to lend up to 33% of your gross pay! This is unsustainable for anyone. Anything over 25% of your take-home pay is going to put you in a bind.
If you live in an area with steep home prices, you may have to get into the 35% range, but just know the rest of your budget will have to make room for this higher percentage. Since purchasing a home is less about the money and more about your emotions, it's easy to get caught up in the bigger and better-but take a step back. Keeping your mortgage at or under 25% of your take-home pay gives you room to breathe. You can take vacations and save for college and contribute to your retirement. When your housing takes up too much of your overall budget, the rest of your financial life suffers.
Renting has a lot of perks, but the biggest is the flexibility. Purchasing a home is a commitment in more ways than one. When it comes to actual time, you need to be able to commit to living in your home for at least 5 years. Why 5 years? Because that is how long it will take you to establish equity or build resale value in your home. Are you ready to commit?
Purchasing a home isn't a rite of passage. It's an earned responsibility. If you can save at least a 10% down payment, land a mortgage under 25% of your take-home pay, and commit to living in the home for at least 5 years, you are ready to be a homeowner. If you can't say yes to all of those checklist items, you need to delay your timeline. And guess what? That's okay. Don't give into societal pressure to purchase a home by a certain age or life stage. Purchasing a home when you are prepared to do so is truly the smartest move you can make.
Peter Dunn, aka Pete the Planner, is an award-winning financial mind who has authored five books, hosts the popular Pete the Planner radio show and travels around the country offering financial education. For more from Peter, visit www.petetheplanner.com.
Got the travel bug, but short on cash? Here's our guide to riding the Megabus—one super-affordable way to get from A to B.
Crushing student loan debt is a reality for many—but debt forgiveness programs offer up a silver lining.
Thirteen super cheap, super easy DIY dorm decor ideas.
No need to break the bank to make a splash on the barbecue circuit. We've got you covered with cheap, easy recipes for grill season.
Master the art of tipping stateside! When to tip, how much to give—and even when to skip it altogether.
A list of Disney World hacks to save you time and money on your next Disney vacation.
Looking to save money on your next trip? Choosing Airbnb over pricey hotels may be your best bet.