For many of us, “home” means sanctuary, family, the place where we replenish ourselves, and feel safe and grounded. For this reason, when the time comes for us to choose and buy our own home, the decision is often deeply emotional – or even impulsive. With everything else that “home” means, however, it is also one of the biggest investments you will ever make. This means you must enter into it rationally, and with care.

For many of us, “home” means sanctuary, family, the place where we replenish ourselves, and feel safe and grounded. For this reason, when the time comes for us to choose and buy our own home, the decision is often deeply emotional – or even impulsive. With everything else that “home” means, however, it is also one of the biggest investments you will ever make. This means you must enter into it rationally, and with care.

To ensure that you buy a home that doesn’t create financial stress, but rather, contributes to your financial well-being and security, ask yourself the following questions before you buy.

  1. How much house can you really afford? With all of the advantages of home ownership, it is important to ensure that you purchase a house that you can reasonably afford, based on your income and your total assets, and borrow no more on that home than your income can support. A good rule of thumb for the “right amount” of home (i.e. the purchase price you can comfortably afford) is 2.0 – 2.5 times your income. In parts of the country with very high real estate valuations, you could go as high as 3.0 – 3.75 times your income.

2. Is your realtor attentive to your guidelines? Yes, realtors work on commission, but a reputable realtor will never try to push you beyond the boundaries of what you can truly afford. Buying a home can be emotional and stressful enough, so be sure to work with a reputable realtor who respects your limits. Ask friends and neighbors for recommendations for realtors in your neighborhood. Then, ask your realtor to focus their search so that the homes they recommend for you fit within the guidelines outlined here.

3. Will you be able to make your mortgage payments? You should plan to purchase a home by paying a 20% down payment to avoid holding too much debt for your income level (more than 5 times) and to avoid paying Mortgage Protection Insurance. Staying within the recommended mortgage amount, which should not exceed 25% of your monthly income, will help ensure that your monthly mortgage payment is sustainable based on your monthly income.

4. In the event of an unforeseen financial emergency, will you still be able to afford the house? It’s one thing to crunch the numbers in an ideal scenario and decide you’re in good shape right now to buy a home, but what if unexpected financial problems crop up in the future? Will you still be able to keep the house? Life happens, so be sure to plan ahead to protect your investment. You should set aside extra savings (liquidity) in the amount of 24 months of mortgage payments. (This is usually 20% of outstanding mortgage balance.) Having this cushion will ensure that you can continue to afford your home even when other money emergencies arise.

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