Emergency Home Maintenance: How to Cover the Costs
It’s incredibly common to go into homeownership (especially as a new homeowner) without considering the maintenance expenses of your future. Although it isn’t always the most glamorous thing you spend money on, home maintenance is inevitable. Maybe the floors needs work, your windows need to be replaced, or you have some sort of plumbing emergency that requires a professional. None of these examples are cheap. Home repairs can put a huge dent in your wallet and they may even push you into debt if you’re not financially prepared. Keep in mind, not all of your repairs will necessarily be an emergency. You may wake up one day and decide you just can’t stand those shag carpets any longer and need to spring for a somewhat unexpected flooring overhaul. The moral of the story: save — and start saving early. But where do you start? And exactly how much should you anticipate saving?
For most of us, saving money isn’t always easy — something to which I can totally relate. It’s far too often that I prioritize directing my money to “now” experiences versus the “what if” expenses of the future. Disclaimer: don’t follow my example. Do, however, take the advice of one of my financial mentors and start managing your personal finances as if you were running a business. Outline your total monthly net income then take out your monthly expenses to find out what your net “profit” looks like. From there, most experts recommend setting aside approximately 10-20% of that profit for general savings.
Keep in mind that lenders will look at your DTI (Debt-to-Income) ratio for your mortgage application. Consider using that info to accurately understand what your debts truly are
Another way to plan out your savings is to use the 50/20/30 budget rule — where 50% of your net income goes to recurring payments such as your mortgage, 30% goes to flexible spending like shopping and dining out, and 20% towards your savings.
Saving for home repairs
Beyond general savings, you’ll want to specifically set money aside for your home repair fund. When you buy a home, you shouldn’t be in financial stress as a result of the purchase. Your lender will keep that in mind. And since most loans require a home inspection, the likelihood of you purchasing a home to then have an emergency repair on your hands is slim. But to prepare for what-ifs, it’s a good idea to consider having a separate savings account for home repairs to avoid the temptation of using that money for other purposes. You can always double check with a financial expert if this is a good method for you. So what portion of your general savings should be allocated to this repair fund?
Experts agree that a good rule of thumb is to shoot for saving approximately 1% of your home’s purchase price annually.
For example, if your home was valued at $195,000 you will want to save $1,950 to be dispersed throughout the year. For monthly budgeting purposes, in this example you’d set aside approximately $163 a month into your repair fund.
Saving requirements for prospective homeowners
Some lenders may require you to have reserve funds. A reserve is money that you have saved prior to loan approval. As mentioned previously, your lender looks at your DTI ratio and all your assets to get a clear picture of your financial situation. What does this have to do with home repairs? In short, your lender would want to confirm that you have enough liquid (or readily accessible) reserves (or savings) to cover all of your home expenses, including possible repairs, and still comfortably pay your mortgage.
On average, most lenders will require 3-6 months of reserves, but this may vary based on income level and income type.
For example, a lower or unstable income would be riskier for a lender, and therefore require a larger reserve prior to loan approval. Similarly, if you have a commission based income , you may be required to have a larger reserve than an applicant with a salary-based income.
Warranties and insurance for repairs
Some emergency repairs would be covered by either homeowner’s insurance or a home warranty, both of which are best practice to have. Home warranties are in addition to the purchase of your home, not something automatically included. If you’re buying an older home, then it may be a good idea to consider getting a home warranty, which is different than homeowner’s insurance. A home warranty is basically a renewable contract that provides services for replacing and repairing your home’s major components and appliances. It can fill in coverage where homeowners insurance might not. So what does a warranty cover? It can cover certain items like kitchen appliances, water heater, HVAC, plumbing, electrical, and in some cases, washer/dryer, and sometimes pool systems as well. It’s also possible to expand your plan in some cases to include additional coverage of other items too. Read more about warranties versus insurance.