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Buying
a house, especially your first house, can be a thrill and a blessing.
Doing so at the wrong time or in the wrong way, however, can
quickly turn the experience of buying a house into a gut-wrenching
disaster. In this article, I will point out the biggest mistakes
I see people make when it comes to buying a house.
Mistake: Buying too much house.
I
think the mistake I see most often is probably this one: buying
too much house. If you are truly concerned about your finances
and your future, then you must always remember that a house is a place
to live, not a status symbol. Buying an expensive, fancy home in
order to be envied by others is fine if you can afford it, but very few
of us can really afford to show off in that way. It might even be
possible that you feel you can afford it because you can make the
payments, and that may even be true; however, making those payments is
taking up money you could be using to provide financial security for
your family or to become wealthy. You end up with a nice house,
but you give up all of the things you could do in the future if you
were wealthy.
Your first home.
When
you are buying a home, especially your first home, try to buy a little
cheaper than you would really like. Don't forget that if your
finances allow, you can always buy a nicer house sometime in the
future. But for now, try to buy a little less home than you
really want. The very first house you buy is sort of an
experiment. Your first home will teach you what you do and don't
like about a house, and what it is really
like to pay all of the additional expenses associated with owning a
home. In your first home, you will learn what kind of layout you
do and don't like, what kind of closets you do and don't like, what
kind of kitchen you do and don't like, what kind of heating and
air conditioning you do and don't like, what kind of yard you do and
don't like and what kind of neighborhood you do and don't like.
You may think you already know what you like, but you will be
surprised how quickly your mind can be changed when you have to live
with things that didn't work out the way you thought. It is much
better to learn these things on an easy-to-sell, less expensive home,
than on a big, expensive home.
Your first home will also teach
you what it is like to suddenly be responsible for such things as
mortgage payment, taxes, insurance, repairs, maintenance, etc. It
is much better to get used to this with smaller amounts than with the
large dollar amounts a fancier home will require. If you have
trouble paying all of these additional expenses on your less expensive
home, you will be very glad you didn't buy something more expensive.
If, however, you find that you can easily meet all of these
obligations and more, then you can consider eventually buying
something nicer. You don't want to move into your first home,
realize you can't afford all of the associated expenses, then end up
having to sell it or, even worse, having it taken away from you.
Any home.
When
buying any home, don't fall for the 'too much house' trap.
Usually this trap comes in the form of a 'once-in-a-lifetime
deal,' or being able to qualify for more financing than you thought.
Please don't fall for the once-in-a-lifetime trap. There
are houses for sale every day. There are good deals out there
every day. It is only a matter of time and effort to find one.
Besides, sometimes these once-in-a-lifetime houses only seem to
be a good deal--beware, the house my be cheap for a reason! Too
many times, I have counseled young couples who were having
trouble making the mortgage and tax payments on their house and were in
danger of having it taken away from them. Often, the house is way
more than a couple with one or two kids, or even no kids, needs.
It's amazing how many times, when I ask them how they ended up in
a house so much nicer than what they could normally afford, the answer
is that it was such a deal they just
couldn't pass it up. They got it cheap because someone neglected
it so gave them a good deal because it needed repairs. Or,
someone died and the heirs were selling the house cheap just to get rid
of it. Or, some little old lady didn't realize what her house was
really worth and sold it really cheap. Or, it was their parents'
or grandparents' house so they got a really good deal on it. Whatever
the reason, the house is never a good deal for you if you can't afford
it. It may be a legitimate deal, but that doesn't matter if you
can't afford it--at least it shouldn't
matter. Don't let a 'good deal' get you into a more expensive
house than you can afford, or into buying a house before you are really
ready.
As
for the financing, you can usually qualify for more
than you should. I have, on my computer, a program that lets
me type in information and do an estimate on what a bank would be
likely to lend for a mortgage based on the information I enter.
Just for the fun of it, I ran it on myself and was astounded to
see that it said the banks would qualify me for a mortgage that was
nearly twice what I should actually have. A mortgage that is
double what I should have sure wouldn't allow me to ever become debt free and wealthy.
I immediately saw the danger in being able to borrow so much
more than I should; however, most people would instead see it as an
opportunity. Most people would be thrilled at the larger mortgage
because it would mean they could get a nicer home. Notice I said
they could get a nicer home--not afford
a nicer home. Just because the banks would lend the extra money,
doesn't mean you should take it. The problem is that the bank's
calculations are based on you having no significant savings,
always being in debt, always being financially stressed and making debt
payments for the rest of your life. That is why their
calculations qualify you for more than you can really afford. The
calculations I use for how much mortgage you can afford are based on
you eventually being completely debt free and wealthy. Don't buy
a more expensive home just because someone is willing to lend you the
extra money.
Mistake: Taking on too large of a mortgage payment.
Since
I have already talked a little bit about the financing, lets talk about
the mortgage payment. Like I said, the banks will qualify you for
far more than, in my opinion, you can really afford. The banks
are concerned with how big of a mortgage payment you would be able to
make, whereas I am concerned with how big of a mortgage payment you can
comfortably and easily afford. The bank's way of doing it causes
you to be right on the edge of financial stress--my way reduces the
financial stress considerably and allows you to get ahead financially.
So what kind of mortgage payment can you actually afford?
In
my opinion, and based upon my experience as a financial counselor, you
can afford a mortgage payment that is about 20% of your monthly
take-home pay. You simply take the amount of money you bring home
in a month and multiply it by .20
(point two zero) to calculate what your payment should be. This
number would give you the ideal, recommended amount you can afford for
a house payment. Even though it would slow down your financial
progress, you could go as high as 25% of take-home pay--but
no higher.
Here's an example:
You bring home $2,800 per month.
That is your net, not your gross income. In other words
$2,800 is what the amounts written on your paychecks actually add up
to each month. You take that $2,800 and multiply it by .20
$2,800 x .20 = $560
So, ideally you should have a mortgage payment of around $560 per month. And it should never be higher than 25%, so:
$2,800 x .25 = $700
In
this example your mortgage payment should never be higher than $700 per
month--and remember that is the maximum, the $560 is what you should
really be shooting for.
To figure out how much you can borrow, you can download and use my free Loan Calculator.
Enter whatever the current interest rate is for a mortgage at
your bank, and how long you want to have to pay it. I use 30
years. Next, enter 560 for monthly payment and
click 'calculate.' The loan amount will then show up in the
box labeled
'loan amount.'
I'm sure it will seem to many that this sure
doesn't buy much house, but these calculations only affect what your
payment should be, not what you pay for the house. If you want
more house with the same, smaller payment, spend the time to save up
more down payment. The bigger the down payment, the nicer a house
you can buy for the same mortgage payment.
It is critical that
you finance a house the right way. I recommend a 30 year, fixed
mortgage. If the payments are still around 20% of your monthly pay, then a 15 year fixed is
even better because you get it paid off much sooner. Don't get
any kind of adjustable rate, interest only or nothing down mortgage.
I want it and I want it now.
Buying
a home before you are ready is usually just a matter of being
impatient. Either you decide you want a home and you don't want
to spend the time and effort it would take to do it correctly, or
someone else thinks you should buy a house and talks you into the idea.
If you are struggling with the feelings of 'I want it and I want
it now,' then don't make buying a house your goal--instead, make
getting ready to buy a house
your goal That way you are still working toward eventually buying
a house without jumping into it too soon.
If someone else is planting into your brain the idea that you should buy a house, just be careful from whom you take your advice.
I have found that people who are broke and financially stressed
are often very quick to give financial advice. Remember, we
aren't doing things the 'normal' way here. Normal is being broke,
being financially stressed, being in debt, and having no savings.
We are trying to not be normal. We want to be debt free, have savings for emergencies, be free from financial stress and
have a house as well. Don't let yourself end up in financial
trouble because someone else talked you into buying a house before you
were ready.
What to do to get ready.
So,
what things do you have to do to get ready to buy a house? Well,
first of all, you have to understand that buying a house is a big
financial decision. Do it the right way and your home becomes a
blessing--do it the wrong way and your house becomes a curse!
When buying a house, there are a lot of 'gotchas' to look out
for. Taxes generally do go up over time and you have to pay them
if you want to keep your house--sometimes these taxes go up a lot!
There may even eventually be a school levy or two added to your taxes.
Also, most people underestimate what repairs and maintenance
actually cost. Just for the fun of it, call around and ask a
couple of plumbers what it generally costs to have a water heater
replaced. Find out what it would cost to replace a furnace or air
conditioner. Ask a roofing company what it costs to re-shingle a
roof. Find out what having carpet replaced would cost. I'm
not saying to get actual estimates, just ask them what the average cost
ends up being. Is your house going to have a yard? Then you
better also price out an appropriate lawn mower and figure in the cost
of fuel to run it. As you can see, buying the house itself is
only part of the expense. It's these 'gotchas' that take you out
financially. That is why I want you to be totally ready before
buying a house.
First of all, make sure you are completely out of debt, or nearly so. Once you are debt free, or are down to one or two small debts about to be paid off, then
you can start thinking about a house. Yes, getting out of debt is
a lot of work and can take a bit of time, but if you don't get out of
debt before you buy a house, you are just being normal, and normal is
broke and financially struggling. In addition to your mortgage
payment, you're also going to have taxes, insurance, maintenance,
repairs, utility bills and renovation expenses you haven't had before
and aren't used to. Add that to all the 'gotchas' I mentioned
before and you can end up in financial trouble very quickly.
Besides, if you are struggling to pay off debt plus trying to
make a house payment, where is the money going to come from to get
ahead? If you are out of debt, you can buy a house and still
get ahead and become wealthy. If you are in debt and then buy a
house on top of it, you will likely get stuck right at that point
for the rest of your life. If you want to buy a home, get out of
debt first.
Next, make sure you have your three to six months
worth of income saved up for emergencies. You think you have
financial emergencies now, just what until you own a home! When
you own a home, unexpected expenses pop up often, and can be very big.
Without emergency savings, you
will be financially taken out by the first, big, unexpected expense
that comes along. With your savings in place, you can deal with a
financial emergency without borrowing any money. If you have to
borrow money to deal with emergencies because you have inadequate
savings, you are slowly putting yourself back into debt, or deeper into
debt, and your financial future gets bleaker and bleaker.
Finally,
save up an adequate down payment. You should make a down payment
of at least 20%. Any less, and you have to buy PMI (Private
Mortgage Insurance) which is expensive and is an additional expense you
don't want. Don't fall for the loans where the lender structures
it so you don't have to put 20% down to avoid PMI. Some lenders
will, more or less, lend you the 20% down payment and finance it along
with your mortgage. The interest, fees and expenses are usually
very high and you end up paying a higher monthly payment for less house
than if you did things the right way.
So there you have it:
Before
buying a house, make sure you are debt free, have three to six months
worth of take-home pay saved up, and have a 20% down payment saved up.
Yes, this all takes a while and requires a lot of effort,
sacrifice and commitment, but it is really worth it when you are
enjoying your new home without all of the stress and financial
difficulty that a lot of people experience when they do it wrong.
Besides, if you do the things I have recommended before
you buy a house, you will likely find that you can afford a nicer house
in a nicer neighborhood than you otherwise could have. The few
extra years it may take to get ready to buy a house will be well worth
getting to spend the rest of your life in a nice house in a nice
neighborhood. And, if saving up the 20% down payment is going to
take longer than you want, just buy a less expensive home for now.
You can always move into a nicer home later after you have saved
up more down payment.
