There are two answers to this.
Answer #1: As soon as you have $80,000 cash.
Answer #2: As soon as you can answer yes to all of the following questions.
- Have I paid off all of my debt, including credit cards, student loans, auto loans and any other miscellaneous debts that I might have?
- Do I have at least 3 to 6 months reserves to cover all expenses in my life based on the cost of owning the home?
- If I calculate my living expenses, taking into account what it would cost me to own an $80,000 home (taxes, insurance, maintenance, HOA, etc,) would my total housing expenses be no more than 25 to 30% of my take-home pay?
- Am I contributing 15% of my income to my retirement?
- If I have children, am I contributing 15% of my income to their future education? (obviously not a concern if you don't have children)
- Above and beyond all that I've answered yes to, do I have 20% of the value of the home I'm looking for available for the down payment?
If you answered yes to all of those questions, then you're probably going to retire a multi-millionaire cause you're just smart like that. If you answered no to any of them, my advice would be to position yourself so the answers become yes. Reduce your costs, focus, live with financial intention, and make those conditions ring true so when you buy a house, it becomes a blessing, not a curse.
Is it an absolute rule to have all of these things in order? Well, I would say that it is best practice, but not required. However, you DO need to have money in the bank in order to purchase a home, because there ARE associated closing costs and not all of them are allowed to be paid by the seller, nor will every seller agree to pay them.
What about FHA?
FHA insured loans are an option, but they cost a bit more in the short and long run due to the requirement for mortgage insurance. When you buy a house, if you don't put enough down, the lender will require that there be an insurance policy in the event you fail to pay and default on your loan. This usually runs in the $40-50/month range. FHA allows you to purchase a home with as little as 3.5% down. It's actually the most popular loan product right now.
3.5% of $80,000.00 is $2,800.00, which is quite a big difference from $16,000 (20%).
So what's it going to cost me every month to buy an $80,000 home?
Well, let's assume you go FHA and you put $2,800 down. Your closing costs, including your down-payment would require you to have approximately $6,500 cash to close the deal, assuming you don't ask the seller to help with closing costs. You'll probably be able to negotiate 3% of the purchase price to be paid by the seller towards closing costs, which would reduce your cash required at closing, but for now, we'll assume there will be no assistance.
So, cash at closing would be $6,500, give or take. Mortgage insurance will be $60/month. Your payment, based on a loan amount of $77,200 ($80,000 - $2,800) at 4.275% will be $581.70. And there's one last thing. Property taxes. On an $80,000 property, you're probably going to be assessed somewhere around $800 annually. That makes your monthly at $66.00.
Purchase Price: $80,000.00
Down Payment: $2,800.00
Loan Amount: $77,200.00
Interest Rate: +/- 4.275%
Closing costs: +/- $3,700
Cash due at closing: +/- $6,500
Monthly Mortgage Payment: $581.70
Mortgage Insurance: $60.00/month
Total monthly payment: $701.70 for the first 27 months, after which the loan to value will be 80%, dropping your need for that $60/month insurance payment.
Total cost to own the home once it is paid off in 15 years? Approximately $118,000.00. With appreciation, your home would be valued at approximately $125,000.00. If you rent at $800/month for 15 years, you will spend $144,000 and have nothing to show for it.
The calculation I used to come to this conclusion included many variable factors. Not only did I include the mortgage amortization schedule, but I also accounted for an historical increase in value of approximately 3% annually, which will inevitably affect the amount you're paying in property taxes, causing an adjustment to your payment annually. I also included the fact that after only 27 months, your monthly payment would go down by the amount of the mortgage insurance which was calculated based on .9% of your total loan, as is likely with FHA.
The moral of the story?
If you start now, when prices and rates are low, you can get yourself into a property that will help you build wealth in the future. How? Well, think about it. If you live frugally for 15 years (for many of you that puts you at about 40-50 years of age), not including increases to your income as you grow to help speed the process up, you will have a paid for house and you won't have any idea what to do with all of that disposable income, other than give, save, and spend.
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