On What Baby Step Should You Buy a House?
Deborah asks when in the Baby Steps she should buy a house and how much house to buy. Dave explains.
QUESTION: Deborah on Facebook asks when in the Baby Steps she should buy a house and how much house to buy. Dave explains.
ANSWER: I want you to be out of debt and have your emergency fund in place, which means you will have done Baby Step 1, which is $1,000 in the bank. Baby Step 2 is debt-free but the house using the debt snowball. Baby Step 3 is a completed emergency fund of three to six months of expenses. Then you're ready to save for a house. Before you start retirement, it's okay. Before you start kids' college, it's okay.
What we call Baby Step 3(b) is where you save for a house—after the emergency fund of three to six months of expenses plus your down payment. Once you do that, we want you to buy a home where the house payment is no more than a fourth of your take-home pay on a 15-year fixed rate mortgage. That's very conservative. On a 30-year adjustable rate mortgage, you can actually qualify for almost twice that much house. But that'll put you in a mess. You don't need to buy a home until you have your mess cleaned up.
Buy a home from a solid foundational financial footing. That way, you don't hit the wall and just crack up everywhere.