Am I Ready to Buy a House?

Buying a house can be a wonderful blessing for your family and a great way to build wealth. But make sure you’re actually ready to buy—otherwise, homeownership becomes a decades-long curse.

Phase 1: Is Your Financial Foundation Ready?

Are You Debt-Free?

You’re ready on this front when you have zero consumer debt—no car payments, credit cards or student loans.

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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. So, before you buy a house, buckle down and knock out your debt as fast as possible using the debt snowball. Once debt’s a distant memory, get busy stockpiling money in an emergency fund. Then your budget will be secure and you can focus on saving up a down payment.

On the flip side, some will say you need debt to earn a good credit score—since that’s the only way to get a mortgage. But that’s a bunch of bull. You can actually buy a house without a credit score. And if you’ve been living a debt-free lifestyle, you probably don’t have one—which is a great thing!To get a mortgage without a credit score, all you have to do is work with a lender that does manual underwriting. That’s when a lender personally digs through your financial history (rent, utilities and income) to see how you manage money, and then approves you for a mortgage . . . instead of relying on a goofy algorithm to predict how you manage debt (a monkey could do that). Sure, having a lender manually underwrite your loan isn’t what’s considered normal these days. What’s “normal” is for lenders to approve buyers for a bigger mortgage than they can afford. Normal is broke. Be weird!

Do You Have a Full Emergency Fund?

Having a fully funded emergency fund of 3–6 months of expenses means a surprise bill won’t turn your new house into a crisis. If you buy a house without an emergency fund, you’ll be in big trouble when something inevitably goes wrong—think a leaky roof or a faulty HVAC unit.

Phase 2: Do You Have the Buying Power?

How Much Down Payment Do You Need?

Aim for 20% down to avoid PMI—insurance that protects the lender, not you. If you’re a first-time home buyer, a smaller down payment—at least 5%—is okay (but you will have to pay for that pesky PMI). A bigger down payment means smaller monthly payments and a smaller loan, overall.

The best way to buy a home is to put 100% down (trust us, it’s possible). But if paying cash for your home isn’t realistic for your timeline and you want to take out a mortgage, then a good down payment is essential.

For a simple plan for how to save up a big down payment fast, download our Saving for a Down Payment Guide.

Do You Really Need a 15-Year Fixed-Rate Loan?

The only type of mortgage you should even consider is a 15-year fixed-rate conventional loan. Going for a 30-year loan may seem like a good way to lower your payments, but it’s also a good way to pay a ton more (like, tens of thousands of dollars) in interest while you stay in debt for an extra decade and a half. You should also stay far away from FHA and VA loans, and all their pesky fees.

If you borrowed $300,000 from a lender as a home mortgage, here’s what it’d look like across two different loan terms according to our Mortgage Payoff Calculator:

The 15-year loan costs about $227,000 less in interest and gets you out of debt 15 years sooner. That’s the difference between a house that builds wealth and one that just lines your lender’s pockets.

When you’re ready, our friends at Churchill Mortgage can walk you through getting preapproved for a 15-year fixed-rate loan.

What’s the 25% Guideline for Affordability?

The 25% guideline means your monthly house payment should never go beyond 25% of your take-home pay. That includes principal, interest, taxes, insurance, PMI and homeowners association (HOA) fees.

Why? When your house payment eats up more than a fourth of your take-home pay, your budget will be way too tight. Tying up that much of your income in a house payment won’t leave you enough money to put toward other important financial goals like saving for retirement. That’s what we call house poor.

So, before you pull the trigger on a new house, add up how much your monthly payment would be and make sure it won’t go past that 25% mark. Our Mortgage Calculator will give you a realistic look at what that number will be.

And don’t forget, your monthly payment is more than just the principal and interest on your loan. More than likely, you’ll also be paying for . . .

• Property taxes: Local governments raise money through property taxes to fund things like schools, law enforcement, fire departments and (supposedly) fixing potholes.
• Homeowners insurance: Sure, homeowners insurance adds more dollar signs to your house payment. But paying for coverage will be way less expensive than trying to replace all your stuff out of pocket if your house ever burns down. Plus, your mortgage lender will require you to have it.
• Private mortgage insurance (PMI): Remember: You can avoid PMI if your down payment is 20% or more. But if you make a smaller down payment, PMI will add to your monthly payment until you build enough equity to cancel it.
• Homeowners association (HOA) fees: Basically, HOA fees are for community maintenance and upgrades. If you buy a house in a community that has an HOA, you automatically become a member and will be expected to pay the fee and keep your home up to HOA standards to help increase the overall property value in that community.

How Much Are Closing Costs?

Some home sellers cover closing costs to sweeten the deal—but don’t bank on it. According to Ramsey Solutions’ Real Estate Report, the median closing cost for buyers was $7,306 (not including the amount you pay your real estate agent). Closing costs cover items like:

• Loan origination fee
• Home inspection
• Appraisal
• Prepaid property taxes and mortgage insurance
• Title insurance
• Recording fees
• Underwriting fees

You’ll get a better idea of what your costs will be when you receive a loan estimate from your lender after you apply for your mortgage. Just be aware that these can change before it’s time to close on your home.

You should receive your final closing disclosure form at least three days before closing. Be sure to review it carefully for unexpected cost differences, and ask your lender to explain any charges you don’t understand.

Phase 3: What Else Should You Plan For?

How Much Should You Budget for Moving?

How much you budget for moving depends on how far you’re going and how much you’re hauling—but always set aside a separate pile of cash for it.

Now, getting extra manpower behind your move may be as cheap as a few pizzas to bribe your friends with trucks. But if that won’t cut it for you, or if you’ll be moving a longer distance, putting aside some money for a moving and storage company could be a great idea.

Besides the heavy lifting part of your move, here are other expenses to be ready for:

• Boxes, bubble wrap and other moving supplies
• Deposits for utilities
• Cleaning supplies
• Appliances that aren’t included in your home purchase
• Any pre-move-in upgrades like painting, new furniture and closet organization

Get good estimates for what these costs will be—request quotes from moving companies, shop for appliances, and so on. Pad your move-in budget a bit so things go as smoothly as possible, and don’t let new-home excitement cause you to overspend on items you don’t need right away.

How Long Should You Plan to Stay Put?

Another thing to think about is whether you’re at a place in life where you’re ready to stay in your city for more than a few years. Most of the time, buying a house is a bad idea if you’re not planning to live in it for at least five years.

Why? Because it usually takes at least five years for a home’s value to grow enough to keep you from losing money when you resell it. For example, if you stay in a home for three years and its value only increases by 3% in that time, you probably wouldn’t even make back the money you spent on closing costs if you sold the house.

If you’re in an area where home values have increased rapidly over the last five years and houses for sale don’t spend much time on the market, the math may work out for you to buy instead of rent. But 90% of the time, renting is the better option if you’re not planning to stick around for long.

Do You Have a Real Estate Agent You Can Trust?

It can sometimes be difficult to find a house you love that’s also within your budget, but it’s a whole lot easier when you have a real estate agent on your side. Plus, working with a buyer’s agent brings two other big benefits:

• Saving money: A buyer’s agent can save you thousands of dollars on your home by fighting for your best interests at the negotiation table.
• Saving time: Without an agent, you’ll have piles of paperwork to wade through. Life’s too busy for that! Let an expert who knows all of the laws and regulations specific to your city take care of the red tape for you.

Not Ready Yet? Here’s Your Plan.

If you’re not financially ready to buy yet, the best move is to keep renting while you aggressively pay off debt and build savings. Renting isn’t throwing money away—it’s buying yourself time to get ready so your home is a blessing instead of a burden.

Here’s the plan: Knock out your consumer debt with the debt snowball, build a full 3–6-month emergency fund, then stack cash for your down payment. Use our EveryDollar budgeting app to give every dollar a job and track your progress toward that down payment goal.

When you’re debt-free with money in the bank and a payment you can cover within 25% of your take-home pay, you’ll be ready to buy—and you’ll buy with confidence instead of crossing your fingers.

Frequently Asked Questions