So You Want to Buy a House—Where do you start?


Owning a Piece of America is a great opportunity to invest in your future and build wealth over time.  As Andrew Carnegie said best, “Ninety percent of all millionaires become so through owning real estate”.  However, where do you start?  I wanted to share my thoughts in three phases:

First, get Financially Fit.  It comes down to financial discipline and investing 20% of your income in yourself before anything else.  No one else is going to invest in your future for you.  It’s up to you.  I call it my 20/30/50 rule to financial fitness and owning anything.  Not everything, but anything you set your mind on.  It’s pretty straight forward:

  • 20% – Take 20% of your take home pay and put it in your savings account which you will use towards your emergency fund and future down payment.
  • 30% – Budget 30% towards your flexible living expenses such as groceries, entertainment, movies, dining out, car payment, etc.
  • 50% – Budget 50% towards your fixed monthly expenses.  This includes your monthly rent, utilities, car insurance, healthcare insurance, etc.

While you’re getting your financial fitness in order with our 20/30/50 budgeting, work on your credit score in parallel.  Having a credit score above 620 will help you get a mortgage at a competitive rate.  The higher the credit score, the more leverage you will have with mortgage lenders and banks.  If you have consumer debt, like an outstanding credit card balance, paying it off can go a long way toward raising your score. And while boosting your credit score big-time can take months or years, smaller increases can happen in about a month. One way to crank it up fast? Make sure you’re using only about 30 percent of the credit available to you. You can also ask your credit-card company to increase your available credit — just don’t start charging more, or you’ll defeat the purpose.  And while you’re at it, be sure that you’re doing the right things to keep your credit score high. Always make payments on time, pay more than the minimum, and don’t close out old credit cards.  Lenders want to see long, good history.

Second, build an Emergency Fund.  By paying yourself 20% of your take home pay, build your Emergency Fund.  Having a buffer of 3-6 months of income is not just a significant accomplishment, but also a big stress reliever knowing you have a financial cushion.  Use your 30/50 budget as a guideline for the value of your emergency fund.  For example, if your current 30/50 monthly budget is $3,000, then you should have a minimum of $9,000 emergency fund.  Once you have an emergency fund, congratulate yourself and it’s time to start working towards your next financial goal which is the downpayment for your new home!

Finally, after you have the emergency fund, get started with your next financial fitness milestone of buying a home.  As a general rule, you should not have more than a 36 percent debt-to-income ratio, including your home mortgage payment.  Here’s how to determine your debt-to-income ratio:

Add up all your monthly debt payments and divide them by your pretax monthly income. For example, if you earn $50,000 a year — or about $4,166 a month — you should keep all your debt payments under $1,500 a month. So if you’re already paying $100 a month on a student loan and $300 on a car loan, you’ll want your house payment to be $1,100 or less.

Once you know what you can afford, you can start saving for a down payment.   I recommend saving at least a 20 percent down payment, which is usually the minimum for avoiding extra fees.  However, if 20 percent seems out of reach, you still have options if you are a veteran or first time homebuyer.  First time home buyers and veterans can buy a home with as little as 3% down payment.  Either way, consult with your real estate agent or loan officer to understand all options available to you.

There you have it, three steps to get you started towards Owning a Piece of America.  Get financially fit with 20/30/50, build an emergency fund, and start saving for a down payment.  Good luck in your journey building wealth through real estate as you’re on your way to becoming America’s next millionaire!