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When is it time to buy a house?

By Keith Rawlinson
Volunteer Budget Counselor

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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.

Before even thinking about getting a mortgage, make sure you read my article 'What Kind Of Mortgage To Get.'

Mistake: Buying before you are really ready.

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.

This article copyright 2007 by Keith C. Rawlinson (Eclecticsite.com).  All rights reserved.
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