If buying a house is on your goals list, I thought I would spend this email walking you through how I would coach someone to do it. For this exercise, we’ll assume that the person I’m guiding has no savings and is in a lot of debt. Of course, you may not be exactly like this person, but I hope that this will give you an idea of how to build financial stability before purchasing a home.
Financial Snapshot
As with all coaching clients, I have everyone complete a financial snapshot so we can clarify their starting position. If you haven’t yet completed one, read this blog post to learn how to do one.
Starter Emergency Fund
Before doing anything else, we must set up a starter emergency fund—one month’s worth of living expenses saved. An Emergency Fund is not the same as down payment money—that will come later. Look over your Financial Snapshot and determine how much money you need to live on for one month if your household suddenly loses all of its income.
For our example, let’s say that we determine that the Starter Emergency Fund is $3,000
You’re now going to review your financial snapshot, examine your expenses, and determine what expenses you can eliminate and reduce. Then, you’ll get aggressive with cutting and reducing your expenses to create as much wiggle room as possible and aggressively save up that Starter Emergency Fund in about 3-5 months.
Lower the Debt-to-Income Ratio
A commonly missed part when it comes to buying a house is the debt-to-income ratio. If you have a lot of debt (especially credit card debt), it can prevent you from getting the house you want, regardless of how great your credit score is.
In our example, our make-believe client has a lot of debt. They have credit card balances on five cards, student loans, and two car loans.
CC 1: $350
CC2: $860
CC3: $1,325
CC4: $2,460
CC5: $7,850
Student loans: $35,000
Car loan 1: $25,000
Car Loan 2: $45,000
We’ll first focus on paying off their two lowest-balanced credit cards. Again, they’ll be aggressive and work to pay those cards off in full in the next six months. But here’s the important caveat: The client has to stop using the credit cards. It does no good to work to pay them off while still swiping them.
For more on starting the debt-free journey, head here to this post.
Beefing up the Emergency Fund
Once those first two cards are paid off, this client will aggressively work to beef up their Emergency Fund. They’ll add another month to their Emergency Fund, increasing their $3,000 balance to $6,000 by saving an additional $3,000. Now that they’ve paid off those two credit cards and reduced their expenses, they should be able to complete this goal within three months.
Paying off the Next Credit Card
Once the Emergency Fund is up to two months, this client is then going to work to pay off the next Credit Card, which is #3 on our list. Again, they should be able to do this within 1-4 months.
Beefing up the EF again
Now that the client has paid off card #3, they are going to bring their Emergency Fund up to three months and increase the balance. So their total balance will end up being $9,000 for a three-month Emergency Fund.
Again, the Emergency Fund and the down payment fund are not the same thing. We must ensure that our finances are stable before we try to buy a house, and by having a solid Emergency Fund in place, we’re setting ourselves up for success.
Paying off Card #4
Now, the client is going to work to pay off credit card #4, which, again, should be possible within three months.
Down Payment Fund
Once card #4 is paid off, the client can then start putting money away in a Down Payment Sinking Fund. This is where the client is going to start researching the prices of homes they would like to potentially buy. Once they have a pretty good idea of the average cost of their ideal home, they are then going to figure out what their down payment should be. If you want to avoid PMI (Private Mortgage Insurance), you’ll typically have to put down 20% of the home’s cost. But if you don’t want to save that much and if you qualify for an FHA loan, you can save 3%. So if the house you want to buy is going to be $350,000, you’ll have to save up at least $10,500 to put down.
For the sake of our exercise, let’s say the client wants to save $10,500 for a down payment. Now that card #4 is paid off, they will work to aggressively save $3,000 in the next three months.
Added bonus: this client is going to save up that $3,000 in a HYSA to earn even more money while they work on the next step.
Pay off the final credit card.
Now that they’ve got $3,000 in their Down Payment Fund, they are going to pay off that last credit card, which will probably take them anywhere from 5 to 8 months, depending on how aggressive they get with it.
Finish Saving Down Payment Money
Now that all of their credit cards have been paid off, they can start saving for their down payment in full.
Now, if you’re reading this, you’re probably thinking, “This is a very long time,” and yes, it is. But here’s the thing—if you’re not financially stable, you should not buy a house.
Buying a house isn’t the end goal—financial stability is. And going into buying a home without that stability is a huge risk. It’s not like renting, where if your HVAC system dies, you can contact your landlord, and they pay to fix it. It’s now on you, and if you aren’t financially stable, it’ll just take a couple of big issues to wreck you financially. And we don’t want that.
That’s why, if you want to buy a house, you must first establish financial stability, even if it takes two years to achieve it.
And no, you don’t have to be 100% debt-free before buying a house. However, you should have a low debt-to-income ratio because the house maintenance and repairs are all on you. Therefore, you must ensure your income isn’t locked into payments so you can keep your family financially secure if/when issues arise.
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