Why It's Important to Build an Emergency Fund Before You Buy a House
You probably understand that it’s important to have an emergency fund in case you lose your job, have an unexpected bill for medical treatment or car repairs, or face some other type of unforeseen situation. If you’re planning to buy a house, you also know that you will need money for a down payment. You may be tempted to hold off on building an emergency fund and focus on buying a house first, but you should have money set aside before you purchase a home.
A Lender Will Require You to Have ReservesMortgage lenders don’t want to take on too much risk. They want to be confident that borrowers will be able to cover their payments.
A lender will require you to have money left over in reserves after you make a down payment and pay closing costs. That can give the lender confidence that you will be able to cover your mortgage payments for at least a few months if an emergency arises. Reserves can be in the form of a checking or savings account, stocks, bonds, mutual funds, retirement accounts, or some combination of these.
The amount of money you will need will depend on your lender’s guidelines. In general, if you have a high debt-to-income ratio, you will need a larger amount of cash reserves.
Be Prepared for the UnexpectedHouses need maintenance and repairs. Costs will most likely vary from month to month and from year to year. Major problems that must be addressed immediately may occur at any time. For instance, the roof may begin to leak, or the furnace may fail. Having money in an emergency fund will allow you to cover those repairs whenever they’re required.
If your house needs major repairs that you can’t cover with an emergency fund, you may have to finance them with a credit card. With interest, you may have to pay back far more than the actual cost of the repairs.
If you lose your job, you will need money to cover your mortgage and other living expenses, possibly for several months. If you don’t have enough set aside, you may fall on hard financial times and may even wind up in foreclosure and lose the house you worked so hard to buy.
Make Building an Emergency Fund a Top PriorityUnexpected problems are a fact of life, which is why it’s important to be prepared. That may mean delaying a home purchase, but knowing that you will be able to handle problems will give you valuable peace of mind.
Your emergency fund should have enough money to cover your living expenses for at least three to six months. If you have an older house, or if your family relies on one person’s income, it may be prudent to have a larger emergency fund.