No Reserves? Think Twice
If you are short on savings and have no reserves, you may want to think twice before actually purchasing a home. Many times buyers get caught up in the images of buying a house and they use up all their savings toward down payment and closing costs in order to satisfy their craving to have the independence of home ownership.
Our recommendation is to have at least 10% of your annual income set a side for a rainy day after all your costs of entry into the homeownership business. It is the best investment for your money but just like any business you need to be well funded when you get started.
Craving ownership is not ever bad really. But, if you have no ability to save after you have closed on the house because of the payments being just barely reachable, water, power, telephones and maintenance on the home can become really tight; not to mention the food clothing and insurance that are all like jealous racoons fighting over their portion, grabbing at the paycheck every week.
If this looks like the case for you... STOP! Re-evaluate your immediate prospects. Postpone buying and wait until you can commit to making these payments, plus putting about 10% of your income into a reserves (savings) vehicle. Our choice is a self-directed Roth IRA.
There is no reason to buy the dream to throw it away shortly thereafter. Some think, "Well if it gets too tough I'll just sell the house!" Selling the asset too soon will usually mean no profit and in certain markets huge losses if you have to sell quickly.
Ironically, most people do not follow this advice, instead they work harder find secondary sources of income and are completely strapped for the first 6 months or even years until they get "used to it". Be careful while choosing this strategy.
Any sudden emergency can really throw your budget and cash safety net into what we like to call the Stress cycle. There are ways out of the stress cycle but none of them are very easy on the soul.
"Just do it"
should not be your motto if you can't keep up with these things. There are real estate "gurus" out there who will tell you to: Ready... Fire... Aim! This should only be used if you have something to fall back on and your risk is tempered with alternative strategies out or what we call exit strategies.
Do not act like an investor when you are using the property as your personal residence. Secure you home base residence first. Build up some reserves then go ready-fire-aim to your hearts content on your second third and fourth properties. You can do it, and we can help.
Most folks with strong job stability and who can expect increases in their pay scales are happy with the no reserves strategy because over time the stress cycle becomes second nature or the opportunity to save becomes more likely.
You are very much able to function and enjoy the benefits of homeownership. Some of these folks take on a second job to minimize the stress effects. If you are willing to do this and sacrifice if it becomes necessary this is a viable solution to getting into the house now.
Sometimes prices of houses are very volatile, moving upward very quickly. We suggest you buy on the dips if you can. The problem with that is this: Nobody really knows when the dips are available.
In real estate it takes months to review data to know if we are in a declining market or not. Once we find out it may be too late to act. There are certain markets where the dip is unmistakeable.
If you talk to a mortgage professional like us or an active real estate agent these are great sources to detect marketplace vibrance. We have our fingers on the pulse of the market. But no crystal ball.
This is why lenders want you to have savings. Lenders, before they sell their own properties will consult with Real Estate Agents for market analysis and opinions of value.
The number one secret to qualifying easily is to have some savings that you do not touch. Underwriters (bank loan guideline referees and loan approval experts) love money that stays in the bank.
Reserves are very important. Everyone should have them somewhere. There's a place for them in your life and without them you end up less secure than you would like to be.
Reserves none: back