How to Know when you’re Financially Ready to Buy a Home Abroad
1. You have done the math between renting versus buying
If you are blindly assuming that you are ‘throwing your money away on rent when you could be building equity’ without having done the math of whether or not this is actually true, you could end up as someone who regrets not having done their homework sooner.
Renting is not throwing your money away – you are simply paying for the service of renting shelter with amenities from someone else. You can’t compare the price of rent to just the mortgage payment without at least taking into account how many extra utilities, maintenance, taxes and so on will cost you.
Do the math before you buy. In some areas, it will be cheaper to buy than to rent, and in others, cheaper to rent than to buy.
2. You have a plan in place just in case you lose your job(s)
If you have maxed out your mortgage from the bank and your budget is really tight, all in the name of becoming a brand new homeowner, you might want to reconsider buying a place.
Run through scenarios of how things will play out if you are unable to make the income you are making right now for 3 months, 6 months and 1 year. That way, at least if you do lose your job, you will already have a Plan B in place to cover your mortgage.
If there are two incomes in the household, you might want to consider living (temporarily) on the steadiest one and banking the other.
Even if you don’t lose your job, you might end up having to take time off anyway, due to medical reasons or because there’s a new bundle of joy on the way.
3. You are realistic about what it costs to own a home
Owning a home is not just the mortgage. You have to consider the extra cost of utilities (it is far more expensive to heat an entire home versus an apartment for instance), maintenance (replacing the furnace, windows, etc), repairs (you may end up with a lemon of a house that requires electrical re-wiring for instance), housing taxes, and last of all, fees such as home inspection and realtor fees.
There are plenty more things to consider but those are the main costs above and beyond renting, so don’t just assume if your mortgage is lower than what it costs to currently rent, that you’re in a good spot.
4. You have 20% saved as a down payment
Anything less and you are asking for trouble. If you don’t have 20% saved for a home, how do you expect to be able to pay off the remaining 80%? Having 20% saved is not just having 20% saved, it is proving to yourself that you are able to save that amount of money (hopefully, easily!) and that you are financially ready to take on the extra cost of a home.
5. You have savings set aside above and beyond the down payment
Your entire net worth should not be placed in a single asset, be it all in one company on the stock market, all in a bank in a low-interest savings account, or lastly, all in a physical asset – your house.
You should at least have savings and investments set aside from your down payment. I like the ratio of 50/50, meaning 50% invested and 50% as your down payment so that not all your eggs are in one basket.
6. You aren’t buying the home as an income property
If you are factoring in that you will have tenants to pay you to rent to help cover your mortgage, you aren’t ready to buy a home.
You can’t rely on anyone to pay your mortgage except yourself, and if you happen to have tenants, consider their rental income a bonus to put towards the mortgage, but not a necessary income to owning a home.
7. The home costs no more than 3X your income
A good rule of thumb is really 2X your income, but I could go up to 3X your income. The ratio is used so that you can see how comfortably you can afford your home.
The bottom line is that owning a home is not just the fun and games of shopping for one, bidding on it and then obtaining the keys to be able to start redecorating and renovating. A home is a real investment and a physical asset that can be difficult to unload for cash if you fall on hard times, so you shouldn’t buy a home and put all your money into one without doing your homework first.