3 Ways to Know if You’re Ready to Buy a House

Everyone’s dream is to have a house they can call their own. You can move freely, hang pictures on the wall, remodel whenever you want, and your children can run around the house without fear of ruining anything. You can paint the wall any color you like and you can even customize your house. All those perks are difficult to get at a rental home.
The decision to own a home however should not be taken lightly. Among my physician friends, about half of them regret buying a house and the other half loves owning a home.
To make your decision easier, we have cut down all the tips we know to just 3 digestible ways to know if you are ready to buy a house.
Before we dive in, let us debunk the myth that renting is throwing money away. Yes! Your grandma is wrong.

Renting is throwing money away. False.

Lots of people, especially the older generation have that belief that renting is throwing money away. This led many people to buy a house when they were not ready to own.
There is an opportunity cost for money. This is about understanding the time value of money. The money at hand today is worth more than the same amount in the future. It is important to ask yourself, can the present money be used towards a better financial goal than buying a home?
Let us use a $500,000 house as an example. It is advisable and actually the best financial move to put down 20%. This allows you to avoid the private mortgage insurance (PMI). If we assume a yearly average interest rate of 8%, which is not outrageous, as SP 500 yield an average close to 10% in the past 90 years.
Down payment for $500,000 house is $100,000. If the 100k was invested in stocks, instead of buying a house, would be worth about 1.1 million dollars in 30 years.
3 Ways to Know If You Are Ready to Buy a House

1. You Have No Major debt

This one is straightforward. Unless you are buying your house cash down, you will be incurring more debt when you buy a house. This is particularly important for young graduates with significant student loan. I am a medical doctor, so I have good experience with student loan burden. Most doctors leave medical school with northwards of $200,000 loan.

According to student loan hero,, Americans owe over $1.56 trillion in student loan debt, spread out among about 45 million borrowers. Undergraduates on average leave school with $34,000 debt. That was an increase of about 70 percent from a decade ago.
Now, visualize adding a 400,000 mortgage on top of $200,000 medical school and $34,000 undergraduate student loan, that’s a $634,000 debt grave you just dug for yourself!! That is soul crushing. With interest, this just compound over time, and you might end up paying double the amount or more by the time you finish paying off your loans.
My advice is to take your time; don’t rush to purchase a home. Focus on settling your current debts before getting into another debt!
That was exactly what we did. Between my wife and I, we owed about $300,000 in student loans, and we hustled to pay it off as a priority. Now we are debt free. At least until we buy a house.

2. You Have An Adequate Emergency Fund

Many financial gurus including Dave Ramsey emphasize having an adequate emergency fund as a priority step in personal finance. In fact the 7 baby steps to financial freedom start with funding a mini emergency fund as step 1.
Emergency fund is even more important if you want to buy a home as it is not fun to be house broke.
An emergency fund by definition is extra cash that you save up and reserve for unforeseen circumstances. The general consensus is that everyone needs at least 3 – 6 months of living expenses saved up somewhere.
As a home owner, you would want to be on the side of caution and do at least 6 months. House comes with increase spending and emergencies will happen and you can’t just call your landlord anymore. You are now your own landlord. With one major disaster, ones financial journey could come to a sudden halt. An emergency fund can tapper a disaster to just a bump in the road. Emergency fund gives you a peace of mind.
It is generally recommended to have at least 1% of the cost of your home saved up every year for maintenance. Going back to our $500,00 home, you would need $5,000 yearly for maintenance. I will aim for 3%.

3. You Have A Secure Job

Job stability is very important factor in your decision to buy a house. I know what you are thinking, this is too obvious. You need a job to pay for the mortgage consistently otherwise your house will be claimed by the bank.
My main reason for bringing up this point is because it takes 3-5 years to break even on a new home at a bare minimum. So, if you are to own your home for less than 3 years, you would most likely come out ahead better if you rented. If you are not thinking of staying in your job for more than 3 years or it is not stable enough, it is better to rent until situation gets more stable.
You can play around with the rent versus buy calculator here to see when you will break even.
While waiting, this would also give you enough time to save for the 20% down payment, thereby getting the best interest rate and less monthly mortgage payments.
A $350,000 dollar home for example in my area in Arkansas will rent for $2100. When I plugged those numbers into the rent versus buy calculator here, it says buying will be cheaper than renting after 4 years.
The calculation is murkier than that when you consider the fact that we live in a 4 bedroom house for $1,400 monthly. So buying that $350,000 home will mean paying higher than our rent in mortgage. The rent vs buy calculator estimated 12 years until buying outweigh renting.

Summary
I know you are very excited and itching to buy a home, it is a very nice thing to desire and it is an important part of quality of life. But before you take the plunge, checks to see if you have the three requirements above. Are you up to your neck in debt? Do you have a solid emergency fund? And is your job so secure that you know you will be in the area for more than 3 years? If you are a triple yes on those questions, then you are ready to start looking.

About the Author
Dr. Breathe Easy Finance is run by Dr. Adebayo Fasanya, a pulmonary critical care doctor. After paying off $300,000 in student loan in less than a year into his real job, he embarked on a journey to improve financial literacy among young professionals. His main categories are getting out of debt, money saving tips, investment tips, and side hustle tips.

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