There's no "right" time to buy a home, says Suze Orman, personal finance expert, best-selling author of "Women & Money" and host of the "Women & Money" podcast. However, there are a few financial milestones you should aim to reach first.
Before you're ready to purchase your first home, you should sock away at least 20% of your home's expected value to use as a down payment, Orman tells CNBC Make It. Next, make sure you build up an eight-month emergency fund. And finally, spend a few months living off what your budget would be as a homeowner.
Here's a closer look at each of these three steps.
While most financial experts recommend socking away enough cash to cover three to six months worth of living expenses in an emergency fund, Orman encourages having between eight and 12 months worth.
"You need to know that you're going to be secure," Orman said at the 2017 eMerge Americas conference. You want to be covered in case you lose your job and struggle to find another one or are hit with an out-of-the-blue medical emergency.
"What if you get sick? What if you're hit by a car? What if something happens crazy in this world?" Orman said. "We live in the craziest world I've ever seen in my life right now. And the only way you can take craziness out of that is for you to make yourself secure."
Your emergency fund should always remain separate from the money you plan to use for a down payment.
Orman recommends aiming to save the recommended 20% down, although it's possible to buy with less.
When you save that much, you avoid paying private mortgage insurance, or PMI, which is an insurance policy your lender will take out if your loan covers more than 80% of the total market value of the home. It works as a safety net for the bank in case you fail to make your payments.
PMI can add up quickly: Annually, it typically costs between 1% to 2% of your outstanding balance.
"I want you to play house," Orman says. What she means is that you should spend six months trying to get by on what your new budget would be as a homeowner.
"When you buy a home, you have property taxes, you have insurance and you have maintenance," Orman explains, and you'll also need to factor in closing costs and other fees. "All those things will cost you 40% more than your mortgage payment."
Say you currently pay $1,000 per month in rent and expect a monthly mortgage payment of about $1,000, too. To see if you can afford the increased payments, Orman suggests putting an extra $400 into savings each month to represent the additional amount you'd have to pay as a homeowner.
If "all of the sudden, you're struggling," then "you know that you're about to buy a home that's too expensive," she says.
If you're managing just fine after six months, though, you'll be sure that you're in a good place to afford that home. Plus, "you have $2,400 to put towards your closing costs," Orman says. "That's what I would do if I were you."
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