Don't Even Think of Buying a Home Until You Do This

There's one important step you'll need to take before assuming the responsibility of homeownership.

When my husband and I purchased our new construction home roughly 10 years ago, we knew we'd face repairs eventually. In reality, those repairs started popping up just around the time our home warranty, which lasted a year, expired, leaving us on the hook for a number of bills.

In fact, through the years, we've encountered our share of repairs -- some minor, some not. At one point, we had to deal with a burst pipe in our basement. A year or so later, our water heater went kaput, and replacing it made more sense than paying for a fix. We also wound up having to sink well over $10,000 into having the ground around our house regraded to avoid a major flooding issue.

All told, we've forked over a lot of money in the course of owning our home -- a brand-new home, mind you. But we've never actually had to take on any debt to cover those repairs. The reason? Our emergency fund.

If you're thinking of buying a home but don't have money in savings for emergencies, don't move forward. If you do, you could end up with a world of debt -- and stress -- on your hands.

Why emergency savings are crucial

Let's be clear -- non-homeowners need emergency savings as well. But when you own property, there's pretty much no getting around repairs, and some of those repairs could end up being extensive. Without an emergency fund, you may have to whip out a credit card when your roof springs a leak or your air conditioner busts smack in the middle of summer.

And if you're thinking you'll just fall back on a home equity loan, think again. You're not guaranteed to get approved for one, especially early on in homeownership, when you may not have enough equity to borrow against your property. (Equity is the portion of your home you own outright, so if your home value is $400,000 and your mortgage balance is $350,000, you'd have $50,000 in equity.) Also, if you fall behind on a home equity loan, you could risk losing your home completely. While a home equity loan may work in a pinch for some people, it's not something you should bank on.

There's no hard and fast rule about how much emergency savings you should have going into homeownership. Generally, it's a good idea to have three to six months' worth of living expenses in a savings account, but that applies whether or not you own a home.

What I like to do is keep about a year's worth of living costs in the bank. The logic there is that some of it could go toward paying bills if I were to lose my job, but some of it could also help cover a whopping repair that's too much for our paychecks.

You may decide to stash away three months of living expenses in the bank plus another $5,000 for home repairs. Or, you may land on a different figure. Either way, the key is to have money to fall back on in case something goes wrong with your home and you can't put off getting it fixed.

This past spring, my husband and I went out on our deck to set up a family dinner and noticed several planks of rotting wood that were not only unsightly, but a major hazard. Even though our deck wasn't old, and we'd maintained it year after year, a lot of the wood rotted nonetheless. We wound up having to spend over $2,000 to get our deck fixed. Thanks to our emergency fund, scrounging up that cash was fairly easy.

I wouldn't even consider buying a home without having money on hand in the bank for repairs and emergencies. If you're looking to buy a place of your own, it's something you should be mindful of, too.