I’ve noticed a trend on the ‘net over the past two years or so where lots of folks advocate buying a home ONLY when you:
- Have 20% Down payment
- Have the cash for your closing costs (here in New York 4.5%-5% of purchase price!)
- Have 6 to 12 months monthly budget in reserves
6-12 months reserves is NOT enough.
Look at the recent recession: many, many, MANY Americans were out of of work for several YEARS. Lots of folks tapped into their savings and retirement accounts to survive; lots of others lost their homes altogether. Clearly, having ONE Year in reserves wasn’t enough.
Granted, this recession was more severe than those in recent memory, but do you really believe 6 to 12 months reserves is enough?
I can understand a more conservative mindset; it’s a natural reaction to the excesses of the “Boom and Bust.” Believe me, I really do understand because I lived and worked through that debacle. I still cannot believe people’s behavior in those days. Lunatic is a good way to describe it. From the Account Rep’s at the Sub-Prime Lenders to the amateur real estate agents and loan officers to the barely qualified consumers who simply wanted “MORE” I’m still shaking my head to this day.
And so we’re left with a new consumer mentality that, when it comes to buying a home, you should almost pay cash for the house, never mind the mortgage loan.
I applaud such an attitude.
The shame is it’s not based in reality.
Even were one to eliminate all unnecessary debt, never dine out, never rent a movie, brown bag your lunch, hand wash your business clothing, commute on public transportation, take a second (and maybe a third) job, the REALITY is that—for most folks—it would take years and years, not to mention incredible discipline, to achieve this perfect home-buying nirvana.
Again to the reserves. Most definitely a commendable behavior. Maybe worth postponing the purchase of a home and tightening up a family budget to aspire to this noble goal. But many families want a backyard for their kids to play in today. Many other folks are well and truly tired of paying rent to complacent landlords.
For those folks, there’s a mortgage loan and
the option to purchase a home sooner rather than later
with the available means.
Commendable though it may be, saving oodles of cash to put 20% down, pay all your own closing costs and be left with many months of emergency reserves just isn’t practical for many people. And it doesn’t help those same folks achieve the goal of home ownership.
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Hope that helps!