Option 1st Financial Blog

Are you considering the purchase of a home? Well, my advice is to not even consider buying one unless you have at least 3 months of savings. I understand that homeownership is the American dream but it can quickly become the American nightmare if you have not prepared for homeownership and the many expenses that accompany it. And, the best way to prepare is to establish an emergency fund for those rainy days. We all have rainy days; its just a fact of life that rain falls on all of us and you will be in a much better position to cover yourself when it happens if you have at least 3 months of savings. 

The absence of an emergency fund is one of the primary reasons that I've seen many people default on their loan. What happens; well, someone looses a job; the car breaks down or some other emergency occurs. So, most people do what any rational people would do, which is to take money from their paycheck to handle the emergency. 

What typically happens next is the mortgage payment comes due and the homeowner does not have enough money to make the entire payment because of the emergency the week or month before. And, since the home owner does not have a "rainy day" fund to provide them with coverage during that particular rainy day, the mortgage payment cannot be made (lenders do not accept partial payments). 

My experience with customers is that once they are 1 month behind on their mortgage, it is very difficult to catch up so that one missed payment has a domino affect on all of their finances. That is why an emergency fund of at least 3 months is critical to preparing yourself for homeownership. Under no circumstances should you allow a real estate agent, loan officer or anyone else to convince you that you should purchase before you are prepared which means establishing at least 3 months of savings, equivalent to your take home pay. 

I understand that some of you may want to take advantage of the 2009 $8,000 1st Time Homebuyer's tax credit which is an excellent incentive but I personally would not buy a home prematurely to simply receive an $8,000 tax credit unless I had at least 3 months of savings in the bank. The big picture is making sure that you are positioned to keep your home and having at least 3 months savings is the 1st step in the process. 

Remember that homeownership should be the center piece of your wealth building strategy. So, what purpose does it serve to make your payments on time, build equity (the difference between what you owe the bank and the market value of your home) in your home, only to loose it because you didn't take the time to establish a solid financial foundation in the beginning by saving enough money for emergencies.   

Establishing at least 3 months (ideally 6 months) of savings is a best practice in the financial industry. And I would recommend that you follow best practices and not the advice of anyone who may not have your best interest at heart which is anyone who advises you otherwise. For tips on saving for an emergency fund, visit some of our previous Blogs.

As always, best of luck and we are here to service all of your financial services needs, from financial planning, to investments, to residential and commercial real estate loans.