How much of my house-sale proceeds should I use for purchasing a new home?
My ex husband and I are selling the home we bought in 2005 and I will be getting 60% of the sale. I have been pre-approved for a $400k purchase price for a new home and will probably need to put down 20%. I want to buy something, but want to make a smart choice.
Joshua Escalante Troesh, CFP
How much to use will depend on the rest of your financial situation, including your monthly income, the size of your emergency fund, whether you are on track for retirement savings, and even the terms of the divorce. While it is important you get a place of your own, take your time with this decision. You don’t want your excitement over buying a new home to overshadow your rational analysis and decision-making.
Focus On Your Future Cash Flow
The biggest challenge will be avoiding over-buying for the home. More important than the purchase price is the monthly payment and how it fits into your budget. You want to make sure the final monthly payment with insurance and taxes is between 25% and 35% of your monthly take-home pay, with lower being better.
Don’t Make Too Large a Down Payment
You also want to be careful not to sink all of the proceeds of the sale into the down payment on a home if you do not have a funded retirement plan and fully funded emergency fund. This is an opportunity to really jumpstart your finances by building up your liquid savings and shoring up your retirement.
Don’t Rush
When the house does sell, be slow to jump into buying a new property. Put the money to the side and take your time to make sure you’re making the right decision. I know it is exciting to buy a new house but you don’t want that excitement to overshadow your analysis and rational thought. If you don’t have a fiduciary and fee-only financial planner to guide you in this, you may want to look for one. You can also schedule an Ask-A-CFP session with me if you would like to review your situation in detail.