Is 3 months' worth of expenses as EF enough for a new homeowner?

[Safire]

We have a 3 month Emergency fund, and the money we've set aside for a downpayment on a home. Originally, this was to have been a 6 month EF and a downpayment but our luck preceded us, home prices went up and that "ate" into our emergency funds.

We are now shopping for a home. Once we've bought the house, we would be left with only 3 months of expenses in our EF. If you're a long term homeowner could you share if this is a good idea and enough EF for a homeowner? I realize that no one can has a crystal ball and nothing can be said for sure, but how would being in this situation make you feel? We have a moderate nest egg in our retirement portfolios and DH is trying to comfort me by saying we could use that if - God forbid - the situation ever arose but I need your advice / opinion.

Does it make a difference if the home is a brand new construction by a reputed builder who offers a year's warranty? What about if it were a 60 yr old house?

Please share your homeownership experience with me. For the record, if we put down that 20%, our PTI would be the same as our current rent (except for the property taxes which we'd have to save up for and maintenence which we have no idea about).

Should we just postpone "shopping" by another 6 months, build our EF back up to 6 months and hope home prices haven't continued to rise in the meantime? This isn't about timing the market as much as the desire to ensure we have adequate emergency funds to lean back on in case the worst happens.

Thank you all in advance for sharing your insights and feedback. Much appreciated.

 

[HarveyS]

When I bought my first house I spent every dime I had and then some (loan from dear old Dad). I had the bank of Dad to lean back on in the event of an emergency.

...if we put down that 20%, our PTI would be the same as our current rent (except for the property taxes which we'd have to save up for and maintenance which we have no idea about).

I think the T in PTI is real estate taxes. And I always heard it referred to as PITI (principal, interest, taxes and insurance). So, if you put 20% down you won't be the same as your current rent.

Your taxes and insurance may be quite a bit higher than what is currently being paid. If new construction, the tax listed may be for the lot, not the house. If an older house, the seller may have discounts for age, etc. Be very careful and make sure you understand what the your tax will be. Same with insurance. Rates have gone up significantly lately.

You will likely spend quite a bit on garden tools, curtains, and misc. bits and bobs. That can be somewhat controlled, but not completely (the grass will need to be cut).

If an older home, take a good look at the trees in the yard. Any need to come down any time soon? That's a big ticket item that some people don't think about.

 

[Safire]

When I bought my first house I spent every dime I had and then some (loan from dear old Dad). I had the bank of Dad to lean back on in the event of an emergency.




I think the T in PTI is real estate taxes. And I always heard it referred to as PITI (principal, interest, taxes and insurance). So, if you put 20% down you won't be the same as your current rent.

Your taxes and insurance may be quite a bit higher than what is currently being paid. If new construction, the tax listed may be for the lot, not the house. If an older house, the seller may have discounts for age, etc. Be very careful and make sure you understand what the your tax will be. Same with insurance. Rates have gone up significantly lately.

You will likely spend quite a bit on garden tools, curtains, and misc. bits and bobs. That can be somewhat controlled, but not completely (the grass will need to be cut).

If an older home, take a good look at the trees in the yard. Any need to come down any time soon? That's a big ticket item that some people don't think about.

Thank you. PTI is a typo... it should have been PII (Principle - Interest - Insurance). The taxes are also a flat rate where I live and are calculated as a net percentage of the sales value, and then increasing by a set % each year. I've asked my automobile insurance company about a potential homeowner's quote and have a very rough idea of what I would be paying for insurance. The only truly unknown is maintenance at this time.

 

[TheWizard]

I always thought an Emergency Fund was for working people, in the event of job loss.

The costs of running a house should be reasonably well estimated and probably no more than xx% of your monthly income.
I'm not sure what xx is, but it's out there somewhere...

 

[FLSUnFIRE]

I never kept an emergency fund as such but had assets available to tap if needed. Having a fairly high savings rate meant that most big items could be covered just by diverting savings for a month or two to pay the bill. Credit card grace periods were enough to figure out the cash flow if it was a true emergency. Since you are here, hopefully you anticipate a decent savings rate after the purchase.


You could ask the seller throw in a home warranty rather than self-insure. That would cover any surprise "emergency" repairs on major house systems as you rebuild your savings.


Also, be sure not to spend all your cash on the purchase, the first year of home ownership will likely involve new furniture, window treatments, appliances, capital equipment to maintain the house (mowers, etc), improvements, etc.

 

[DrRoy]

Home prices have softened in a few markets, but if you still have 3 mo now, you should probably get the house. You can try to add slowly afterwards.

 

[Koolau]

In one year we have been hit with $12K in water issues (repairs and replacements) PLUS an estimated $13K in spalling repair. It can happen that way. We've spent very little in 15 years in the condo. It just all came together this year. Who knew? SO, we don't keep what we call an emergency fund. We just take more form our 401(k) or other available funds. SO getting the money isn't the "hard" part. Dealing with the juggling and taxable situations IS the hard part. Taking more could trigger IRMAA, higher tax bracket, etc.

I don't know what advice to offer OP, but stuff (you know, "it") happens. I'd try to be ready for it. I'd feel safer with 6 months and better at 12 months (or more) of flexible money. YMMV

 

[retire48in2018]

A “target” for maintenance is 2% of your home value. It goes into a sinking fund (meaning let it build up over years for major issues).

That being said, a brand new home should need very little in first couple years. I don’t know the life of HVAC, roof or windows in your area to guide when is a “peak”. Where we are looking, there’s a lot of homes just over 20 years - that all need a new roof, aging HVAC and lots of windows are needing replacement - so those homes will be well above 2% in first couple years (10-15% needed in very short time).

Upgrading kitchens, bathrooms and interior painting is more discretionary.

So, I would look at age of roof, hvac, and windows to know short term maintenance needs.

 

[Closet_Gamer]

Over the years we bought two new homes and one older home.

The new homes were a bonanza of after purchase spending. They came with no yard ... we got sweat equity building out that yard but it was still hugely expensive. No window coverings ... so we hung those paper shades in the windows for months until we could afford real shades. It just seemed to go on and on. But there were no repairs. Oh, and we needed furniture.

The existing home was 34 years old when we bought it. But it needed a new shed, the hot water heater blew not long after we bought it, the floors needed refinishing, the back deck was on its last leg, and it would have been decorated very stylishly if it was still 1987. Sadly it was 2006. So, once again, lots of spending post purchase. Oh, and our existing furniture didn't really fit properly in the house. So, that.

All that to say ... I would anticipate lots of cash going out the door unless you're buying a new-ish, used home that is a sweet spot between readiness and maintenance needs.

To the original question, I would keep the 3 months EF and ensure you have a good sense of the after purchase costs based on the home you're buying.

Good luck!

 

[pacergal]

Do you have extra $ set aside for window treatments, landscape, yard equipment (new home) or painting, updating (older home), or are you planning on using your emergency fund.

With our first house, an older one, the only thing we were able to do was new paint, new window blinds, and fence. And we had no 'extra" emergency fund at the time. We were skimping by for the next few years to build back an EF, plus the ongoing upkeep.We were so young green to home ownership!

I think 3 month EF is fine.

 

[Aerides]

When I moved into my brand new house by myself years ago, I remember I was hemorrhaging money those first few weeks/months. Window treatments, paint, furniture. Setting up utilities, landscaping. Even though I did all that myself, and a whole lot of it was want vs need, money was just pouring out.

I do think it would be different with an older home, as you'll find more needs than wants right away to take care off, despite any inspection.

Whether 3 months is enough is dependent on how secure your income is, and how portable it is if your company did a RIF (or if you get severance, etc.).

 

[retire48in2018]

I’ll answer directly - when buying a home older than 15 years on 1 income with kids - 6 months minimum, plus a healthy budgeted house maintenance account (2% of home price).

Brand new home, dual income, no kids - 3 months might be ok. Especially if either income can cover expenses.

 

[COcheesehead]

It depends.
I have bought new homes, older homes and we never have had an emergency fund. The reality is most “emergencies” are less than $3000. A credit card gives you time to figure it out. Selling something isn’t the worst thing in the world to pay a bill. You probably have more than $3000 in your checking account. Just make sure you have good insurance, health, home, auto and umbrella.
The one word of caution I will offer is don’t be under capitalized. Houses cost more than you think. You’ll live at Home Depot for the first month buying things you never anticipated.

 

[Sunset]

OP - I would not delay shopping for a house as for all you know, prices could go up again..

I have a few credit cards, so those along with cash would be my emergency fund.

Buying an old house is what I've always done, just consider main parts of a house and if some part is old, add an imaginary cost when comparing houses.
Meaning a 30 year old house that is $10K more than the exact same house next door is no deal.
But that $10K extra house with a 3 yr old roof, 2 yr old furnace and A/C and water heater, and new windows is a deal by comparison.

 

[OldShooter]

When I moved into my brand new house by myself years ago, I remember I was hemorrhaging money those first few weeks/months. Window treatments, paint, furniture. Setting up utilities, landscaping. Even though I did all that myself, and a whole lot of it was want vs need, money was just pouring out. ...

This. "money was just pouring out" Buying a first house requires also buying a ton of "stuff" that we long-term owners already have. Mops, brooms, buckets, shovels, lawn mower, step stool, ladder, garden and lawn tools, garbage cans and waste baskets, plastic storage tubs and baskets, shelving, ...

Where possible, try to buy "stuff" from the departing owner. His lawn mower, for example, will probably be better than one of unknown provenance from CraigsList or FB Marketplace. Haunt some estate sales, buying small house needs like mops and small outside needs like hedge clippers. For hand tools buy good brands (Craftsman) where you find them by the garage-sale-box. The box won't exactly suit your needs but the tools per each will be so cheap that you can throw or give unneeded ones away.

Remember the rule "No plan survives first contact with the enemy." This will console you as your careful and detailed spending plan collapses. Good luck!

 

[MarieIG]

Not every emergency is home related. Sometimes it may involve a child, a vehicle, a health issue, a loss of a job, etc.

With regard to having retirement accounts, if a loan is taken out of a 401k by an employee - that may come due upon termination of employment, with tax consequences if it is not repaid.

The thing about being a homeowner, some of your expenses relative to the home, i.e. mortgage, insurance, property taxes, etc. aren't necessarily adjustable if you have an emergency.

 

[Mark1]

We are now shopping for a home. Once we've bought the house, we would be left with only 3 months of expenses in our EF.
....
Please share your homeownership experience with me. For the record, if we put down that 20%, our PTI would be the same as our current rent (except for the property taxes which we'd have to save up for and maintenence which we have no idea about).

Should we just postpone "shopping" by another 6 months, build our EF back up to 6 months and hope home prices haven't continued to rise in the meantime?

.....

We bought our first and second house (about 9 months apart due to job transfer) and basically had no EF left once we closed on each house and had no where near 20% equity. Also, it sounds like you have enough cash flow to build EF up an additional month every 2 months, which means the every month you will be getting in much better shape and sleeping better.

I say go shopping now and get on with your life. Yes, bad things can happen, but many times good things will also happen if you let them.
Good Luck.

 

[ut2sua]

Does it make a difference if the home is a brand new construction by a reputed builder who offers a year's warranty? What about if it were a 60 yr old house?

In my personal experience, a brand new home requires a lot less to maintain. We have lived a quarter of a century in our current home that we bought brand new, and the 5%(or so)-of-the-home-value-for-yearly-maintenance rule of thumb has not applied to us. It has been less than 1% on average. For older homes, I would imagine more $ will be needed for maintenance.
Regarding the 3 month (or 6 month) EF, I think the stability of work is more important. When buying a home, the most vulnerable time would be right after the purchase (since your reserved $ is the lowest). If you can maintain payments to keep the house for a few years (if the worst case happen), it should relief the reserved $ issue because you can build it back up. A potential plan B solution would be to put less down payment (but there will be some negative consequences to that too). Good luck

 

[Safire]

Thank you all for the feedback and some great tips. I'm just back after viewing a home built in 1937 - older than BOTH my parents and almost as old as my maternal grandmother! The seller is the original owner's descendant and has lovingly maintained the "original features" of the home. Thanks to the tip here to check on the age of the roof, the HVAC and the water heater, it's a hard pass as it would be unaffordable to replace all that, although I did love that farm house sink.

To clarify, the 3 months' EF is also for non-housing related "emergencies" (as Marie pointed out) and although we're much older than the average "first time buyer", we still are inexperienced and appreciate the tip on the 2% sinking fund for maintenance emergencies. The rest of our "cash" is ALL in retirement a/cs because I went overboard and socked money into those, which - in hindsight - was not the wisest move for a putative homeowner. Since neither of us is 59-and-a-1/2 yet they are inaccessible as "emergency savings" except for our contributions.

I told the agent we're working with to show us relatively "newer" homes because I had never thought of the yard until I saw that yard costs add up and all we get is a lot of dirt to call our own.

I also am NOT a fan of fireplaces (because of my son). Just for my curiousity, how prohibitively expensive would it be to get rid of any in the house we end up buying? The agent knows that fireplaces are my nemesis but it seems almost everyone else is a fan because 90% of the homes we've seen all sport at least one fireplace.

Thanks again. I am very grateful for all the help I'm receiving here.

 

[Walt34]

I also am NOT a fan of fireplaces (because of my son). Just for my curiousity, how prohibitively expensive would it be to get rid of any in the house we end up buying? The agent knows that fireplaces are my nemesis but it seems almost everyone else is a fan because 90% of the homes we've seen all sport at least one fireplace.

Well, obviously just because the house has a fireplace or two doesn't mean you have to use them. My sister & her husband owned a house with three and two of them had been bricked in because it would have been too expensive to rebuild them, but they weren't fans of fireplaces either. I think the fire code in their location required it be either maintained and able to be used or bricked up but I'm not sure about that. It may have simply been their preference.

Also bear in mind that even if you don't use the fireplace when you go to sell the house the status of it or if the house you're selling has one will affect the selling price. There's a reason 90% of the homes you've seen have them, that's because they're popular in that area.

 

[retire48in2018]

Getting rid of fireplace …

Disable or physically remove ?

It’s pretty easy to block off, gate lock, etc to make it inaccessible.

Gas - lock valve and close up access to make it safe.

To physically remove - if 90% have it - you might be hurting resale value if/when you resell it without.

 

[Sunset]

More of my house thoughts:

A fireplace for most folks is a nice thought, but they rarely use it after first year or so.
I've had a couple of houses with them, used them at Christmas and that was largely it once we had been there for a few years.
You can simply block one off by various means, even just put screen in front.
Now I would prefer a house without one.

For age of house, DW felt we were buying an old house because it was 20 yrs old.

Also be on the lookout for sump pumps, and waste pumps, some houses have them and need them, others don't. It's better without them.

Any house built before 1980 could have lead paint, and if built in 50's or earlier could have asbestos in insulation and floor tiles.

A 20 year old house probably has better insulation than a 40 year old house, and will have lower heating/cooling bills.

Being on City water and city sewers is a lot simpler than having a well and septic field.