One of the biggest mistakes I’ve seen friends (and acquaintances) make is to buy a home that’s simply too expensive for them. Most professionals suggest a rule of thumb to spend no more that 35% of your net income on housing. And for the record, housing includes more than just a mortgage payment with additional costs such as property tax, utilities, home insurance, and maintenance if you own a condo or town-home.
There are many homeowners who are house poor, and boy do I ever feel sorry for them. Sort of anyways! I’ve never really paid much attention to other homeowners before, that’s until I purchased my first home three years ago. The more I talk about home ownership with others (and read on it), the more I’m amazed by all the people who bought way too much house.
The single biggest reason why most buy more home than they can afford is that they leave it to their lender to decide for them how much mortgage to take out, what amount of down-payment they should put down, and what payment terms they should take, therefore how much house to buy. Seriously though, I thought we preferred being in control of our own fate? Instead most are leaving it to the guy who’s making a killing off their decision.
It seems like common sense, yet many fail to follow the simple rule of home buying: Know how much house you can afford.
Another reason people end up in more home than they can afford is that they’re so anxious to get into the housing market they throw all caution out the window. Furthermore, they allow their realtor to make suggestions, and help them with decision making. Again, you’re allowing someone to call the shots for you who’s going to make a killing for relatively doing very little work.
Most become house poor without planning ahead for home ownership, while others become house poor when their income plummets due to job loss (or loss of one income) while staying in an expensive mortgage payment.
So, here are a few points on how you can avoid either of the above situations, and actually enjoy home ownership.
Know Your Numbers
Know all the numbers ahead of time. Figure out how much mortgage you can comfortably afford to incorporate into your budget and then don’t look at properties that would take you outside your comfort zone. As mentioned above, your home ownership total cost should not exceed more than 35% of your net income. In case you’re wondering, my home ownership takes out 23% of my net income – this includes two bi-weekly mortgage payments, and my monthly condo maintenance fee.
Second, it’s important to realize the financial difference between renting and owning that almost everybody overlooks: A home requires maintenance and upkeep! Therefore you need to save the money up for those costs, so you don’t end up tapping credit and paying huge amount of interest.
Finally, know what it’ll cost to carry the home – things like maintenance, insurance, and utilities – and then build those amounts into your budget so you aren’t shocked when you finally do move in.
Practice Makes Perfect
Much like buying a car (most people’s second biggest purchase), practicing your newly formed budget is key. This is easy to do when you’re renting, simply add on the additional charges you’ll take on every month into your rent budget, and set it aside. For those fortunate enough to live at home, there’s absolutely no reason you shouldn’t practice for 3-6 months before moving into your new home.
Don’t Fall So Easily
Many make the mistake of falling in love quickly with a home, and with a somewhat suggestive and pushy realtor this could spell disaster for the future. Most buyers see something, fall in love, and have to have it at whatever costs. It’s the bidding wars exist in cities such as Vancouver and Toronto where the only true winners are the realtors and the sellers. A buyer WILL NEVER benefit from a bidding war, instead they’ll just overpay dearly for a home that they heavily inflated.
A house may be a great deal at $400,000. But at $500,000 you’re a a fool for overpaying so much. Instead take a deep breath, run the numbers again, and remember that there are other homes out on the market.
Living house poor not only hurts your finances, it takes a toll on you in other areas. Run your numbers over and over again, and find whats a comfortable line for you. Remember that you may need a car in the future, want to take some vacations, and do upgrades on your home over the course of your mortgage. Being house poor removes the liberating feeling of being in control of your finances. Ironically, most of us view home ownership as the ultimate symbol of financial security and success, but if you’re living house poor, your finances are anything but secure.
Have you ever lived house poor? Do you know anyone who’s living house poor right now? How do you think they’re making it through?