How much cash reserve when buying a home?

[Upstater]

I hope you can help me with something that's been occupying my mind. How much of an emergency fund should I set aside when buying a home?

My wife and I are both in our mid-20's and are starting to think about home buying. I thought we were not going to be financially ready until 2011, summer-2010 at the earliest, but am feeling some peer and family pressure with home prices and interest rates being where they are (and the 8k tax credit doesn't hurt either!).

First, a few facts:

* My spouse and I will earn, before taxes, about $55k-$58k this year.
* Prices for homes we are looking at are in the $110k-$127k which are decent-sized homes in good neighborhoods.
* We live in NY (state), that means approximately $300/mo in taxes for a home priced in that range.
* No credit card debt, under a $100/mo in student loan debt, will own one of our cars in 2 months.
* My parents have offered a $5k "house warming" present to help us with a home purchase.

We only have $8.5k saved right now and are steadily putting $200 away every month. Once my wife's car is paid off in October we can save, at a minimum, $500 a month--maybe even $600 if I crunch the numbers.

But when negotiating in a home purchase, how much should I plan on keeping in our savings for an emergency? I know the rule of thumb is 3-6 months of living expenses and 3 months is about $5k. But does that rule of thumb generally apply when someone is scrimping and saving for a home?

[TBH]

I think you need more than the usual 3-6 month emergency fund. There is SO much to buy when you have a new house. We just bought our second house, so it's not even as if we are starting from apartment living, and still I have bought a lot of new stuff--furniture, yard equipment, towels for the second bathroom, cleaning supplies to keep in the second bathroom (we had only one BA before), etc. Eventually I'll also need to buy fabric to make new curtains.

Also, don't forget your living expenses might go up when you move. If your current living expenses are $5K for 3 months, they might be significantly more in a house. Utilities may be higher, and your mortgage alone will be more than half of that number for 3 months.

Resist the peer pressure! Tax credit, prices, and interest rates mean nothing if you are not in a good position to buy.

I would wait and save more if I were you.

[NickLeavens]

The closer you can get to that 20% down payment, the more secure you'll be financially. TBH is right about living expenses going up, and needing to have a larger emergency fund because of that. Just look around and see all the people in financial trouble who didn't have a plan at all - and it'll make you feel fortunate to have a plan that you can stick to.

[DC Metro Crab]

If you're putting less than 20%, factor in PMI as part of your PITI. Ideally, you'll want the 3-9 month EF based on your NEW monthly living expenses. If you're coming from an apt, your utilities, home owners insurance will be more so add that in. Even more ideal is that you don't use the EF to buy things like furniture, appliances, lawn care items, etc, so you'd have a separate account just for that. Also, don't forget closing costs. Homes can be a money pit, better to go in with 20% down and hefty savings.

[wincrasher]

Housing prices will continue to be depressed thru next year. There is talk about the tax credit being extended and raised, so you may not miss out on that.

You could go FHA financing with 3% down, that program is really geared for people in your situation. But you'll likely pay PMI each month.

Believe me, there are all kinds of expenses you find out when you buy that first house. Lawnmowers, appliances, window treatments, unexpected repairs, utility deposits, needed furniture. Closing costs can be paid by the seller in this market, so you may not have anything there.

You really need that 3 to 6 month EF as a base savings. On top of that the down payment for your house. On top of that, I'd have a cushion of $5k just for those things you'll need that you don't know about. You'll get no joy out of that first house purchase if it's a stretch. It should be comfortable.

[MonkeyMama]

Being extremely frugal in nature, I don't identify with a new home costs a lot of money (to furnish and such). BUT, I guess I can see that most people do tend to spend a lot of money to set up a home.

What I wanted to say was that an emergency fund is more important when you own a home, than when you don't. There is maintenance to consider. & if you invest a lot in your house, you don't want to lose it because you lost your job and missed a few payments. Cash reserves are very important.

When we bought in 1999, our lender required that we had a cash reserve. Probably unheard of most of the last decade, but just wondering aloud if lenders are heading back in that direction. (It was $10k, or about 3 months' expenses at the time).

Anyway, what I also wanted to say is "peer pressure" is a poor reason to rush into a home purchase. I have bought 2 homes in EXTREME sellers markets. (Interest rates were 8%+ in 1999 and most homes we looked at sold in a minute with 100 offers. I am 100% serious). PEople like us wonder exactly what the rush is. I would personally slow down and ENJOY the buyers' market. Even if the extreme market we bought in, we waited until we had 20% down. Really, what's the rush??

[amedvedovski]

All the responses were very good.
I just want to add 2 cents.
You can start looking to the houses as long as you can see that you can afford 20% downpayment & 6 months as emergency funds. If you find a house don't be afraid to make 'offensive' (very low) offer. And maybe if you find a house that you can really afford and like it by this Dec.
Good luck!
alexfacts.blogspot.com
Twitter: @alexfacts

[mortgage-wiz]

rule of thumb says the optimal mortgage should be 70% of property value. 80% is the max - don't forget you have a downpayment of 20%...