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If you’re thinking about buying a home, there’s a lot to consider. The process of buying a home really starts well before you even start shopping for a house — there’s likely a lot of saving and preparation to do before you reach that point.
But, the sooner you start the process, the sooner you can buy.
Financial planner Riley Poppy of Ignite Financial Planning in Seattle, Washington says there are five steps to take now for anyone who’s considering buying a home.
Consider the non-financial side of owning a home — is it something you’re ready for?
Buying a house is a big commitment — it’s so much more than a financial obligation.
“Understanding a lot of the non-financial aspects before you even start starting the home buying process can be helpful,” Poppy says.
He suggests that people start by figuring out how soon they’d want to buy. Whether it’s a few months or a few years, this will guide several decisions later on in your process, like when to get a mortgage pre-approval, and where to save for your down payment.
He also encourages people to think realistically about where they’d want to live, and how owning a home would change their day-to-day life. He asks, “Do they have any job or career uncertainty? Do they like the neighborhood that they would potentially live in? Have they ever rented in that area before?”
If you’re not sure it’s for you, renting might be a better option to start out.
Top off your emergency fund
“If you were to build a home, you want a good foundation,” says Poppy. That starts with a full emergency fund. If you don’t yet have an emergency fund, building one first is essential.
Having an emergency fund can not only ensure that you’ll be able to pay the bills if something unexpected happens, but it can also help you avoid taking on high-interest debt in an emergency situation. Generally, financial planners recommend that single-earning households save at least six months’ worth of expenses, and three months’ worth of expenses in dual-income households.
Make sure you have the right life insurance and disability insurance coverage
Poppy also recommends that people think about insurance before starting the process. “Have enough disability income insurance, and term life insurance if you’re buying with another person,” he says.
If you don’t already have disability insurance, it’s a necessary coverage for anyone who depends on an income to pay the bills each month. It can help cover your expenses if you’re unable to work due to a disability or long-term injury or illness. While disability insurance is sometimes offered by employers, it may not be enough.
Additionally, a life insurance policy is essential for homeowners, as it can help your partner, spouse or family make ends meet if you’re no longer there. Term life insurance is a popular option for homeowners and young families, as the coverage lasts only as long as you’re paying on your mortgage or raising children. Life insurance policies are cheaper the younger you are. If you know you’ll need one, it’s not worth waiting.
Decide how much home you can afford
If your foundation is set, you can start planning how you’ll save for your home purchase. To find a rough estimate of how much you’ll need to save, figure out how much home you can really afford.
For most people, there’s a simple formula on how much you should spend, Poppy says. “I encourage my clients to keep their home’s principle, insurance, tax, and interest below 30% of their monthly take-home pay,” he says. “That way, buying a home won’t impact their ability to save for long-term goals like retirement or college planning accounts for their little ones.”
Poppy says that many CFPs will say 28% of gross income is ideal. But in parts of the country with high costs of living, 30% is more realistic.
He also advises his clients to start their search at the lower end of their budget. “Find the least amount of home that can satisfy your need to own, and then work your way up,” Poppy says.
Open the right savings account
Once you have these things covered, you’re ready to start saving, or keep growing the savings you already have. “Start allocating a portion of your paycheck into a high-yield savings account,” suggests Poppy.
For most people wanting to buy a home within the next year or fewer, saving for your down payment in a high-yield savings account is the best option. There, money is accessible whenever you’re ready, and isn’t exposed to the ups-and-downs that it would be if it were invested.
Setting up automatic deposits for a home down payment is a smart move to grow your savings. Automating your savings will make sure that you never miss a chance to save, and also makes one less thing to think about.
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