Dave Says: Mortgages and Baby Steps

Dear Dave,

We’d like to own a home someday, but we know we’re not ready for that kind of financial commitment yet. Where does buying a house fit in your Baby Steps plan?

Heather

Dear Heather,

Buying a home when you’re broke is the easiest way I know to become a foreclosure statistic. I’m glad you two are being thoughtful and sensible about taking such a big step.

If you remember, in Baby Step 1 I advise people to save up a beginner emergency fund of $1,000. Baby Step 2 is paying off all consumer debt from smallest to largest using the debt snowball method. Then, Baby Step 3 is where you go back and grow your emergency fund to a full three to six months of living expenses.

With all this in mind, let’s call getting ready to buy a home Baby Step 3b. Save up for a down payment of at least 20 percent to avoid PMI (private mortgage insurance). Also, make sure any mortgage loan is a 15-year, fixed rate loan, where the payments are no more than 25 percent of your monthly take-home pay.

Doing it this way may delay your dream of being a homeowner for a while, but it will help ensure your new home is a blessing and not a financial curse!

—Dave