If your emergency fund doubles as your down payment fund, you're not ready to buy a house, says Jill Schlesinger, a certified financial planner and business-news analyst for CBS.
An emergency fund is usually your first line of defense against debt, and being a homeowner won't render you immune to unexpected expenses such as a job loss, medical emergency, or family crisis. Moreover, owning a home can come with unforeseen expenses of its own, and not having a cash cushion can lead to fearful decision-making, or "scarcity mode," Schlesinger said.
To afford a 10% down payment on a home in Detroit, America's cheapest big city to buy a house right now, you need nearly $19,000 — and that doesn't include the cash you'd need for closing costs.
If you want to build wealth quickly, you should aim to spend around 30% of your after-tax income on housing. That means your total cost of housing shouldn't exceed 30% of your take-home pay.
If you're already at the limit paying for rent and utilities, it's probably not time to buy a home just yet.
The monthly cost of owning a home is more than just your mortgage payment. If you put down less than 20% of the purchase price, you may need to also pay private mortgage insurance. And don't forget about property taxes, homeowners insurance, utilities, and home maintenance.
If you're buying a home, chances are you'll have more space — and more space means more furniture.
Colin Moynahan, a certified financial planner near Charleston, South Carolina, told Business Insider's Liz Knueven that while buying a house is certainly one of the biggest expenses most Americans will face, furnishing and buying appliances for a new home can be a huge expense, too.
It's something that Moynahan says new homeowners might not think about. "They just spent all this money on the down payment. Now, you gotta furnish the place," he says.
Then, there's the fact that expenses start to compound when these things are financed. "Next thing you know, they've got a new credit card, they've maxed the balance out, and they're paying on that for the next five years," says Monhoyan.
In order to qualify for a conventional mortgage — a loan backed by a private lender, not a US government agency — you need a credit score of at least 620.
The higher your credit score, the better chance you have of securing a lower interest rate. Conventional mortgages require a down payment of at least 5% of the purchase price, and any down payment below 20% will also require private mortgage insurance.
It's worth noting that government-backed home loans can help homebuyers with lower credit scores and less cash to put down, but of course, there are some trade-offs.
If you need to take out a mortgage, lenders will also calculate your debt-to-income ratio to determine whether you're suited to take on another monthly payment. You can find your debt-to-income ratio through a simple calculation: Divide all monthly debt payments by gross monthly income and you have a ratio, or percentage (once you move the decimal point two places to the right).
The lower the percentage, the better you look to lenders, because it indicates your debts make up a smaller portion of your earnings.
A debt-to-income ratio of 36% or less is considered ideal and 43% is usually the cutoff for a qualified mortgage, according to the Consumer Financial Protection Bureau. Smaller lenders and government lenders may make exceptions, but the terms of the loan will probably be less favorable.
If you don't have plans to stay at your current job for long, or the nature of your work is transient, it's probably not a good idea to park money in real estate.
"There are times in your life where renting is so much more appealing, it's almost a silly conversation," Schlesinger says. "Rent is not throwing money out the window. Rent is buying opportunity. It's buying flexibility."
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