“Asking your mortgage broker how much you qualify for a home mortgage is like asking a fox to count how many chickens are in your chicken coop.” The Millionaire Next Door, Thomas J. Stanley and William D. Danko (not an exact quote)
I’ve had this experience. We bought our first home in 2004, 4 months before our oldest was born. We were not in the midst of the housing crisis that rolled to a boil in 2008, but we were leading up to it. The home we bought was too expensive for us. But it was a very cute house and we thought we were living the American dream. The bank was willing to lend us way more money than we could afford. I knew very little about finances at the time, and I was still shocked at what the bank was suggesting we could afford as our monthly payment. But we bought the house, with the advice and expectation that we would earn more in the future. Which we did, and we were OK, but we were house-poor, meaning, all of our income went to our mortgage payment. We didn’t have money for anything extra or to save for home repairs and emergencies.
Since then, I’ve learned a few things. Here is my advice for what you should consider when looking at buying your first, or subsequent houses:
- Put away 5-10% of the mortgage every month for repairs. I got this advice from researching rental property purchases, and I think it is a good practice from home owners too.
- General rule of thumb for you to not struggle is for your mortgage to be around 28% of your gross (pre-tax) income. This will leave you money for saving, repairs, food, and fun.
- Look at the roof line, are you going to be able to climb up there and clean the gutters? Are you going to have to buy a new ladder in order to do that?
- How big is the yard, do you have the time and desire to care for the yard? Or have the income to hire out?
- When it comes time to paint, will you be able to do it yourself?
- You have to consider whether you will be able to maintain the property yourself, or if you have the income to pay someone else to take care of it.
When someone uses words like “The American Dream,” get suspicious and seriously consider that you might be getting sold. Is this your dream? Or is it someone else’s?
Yes, homes create security, and I am grateful for mine. But I’m also grateful for everything I’ve learned about houses being liabilities, not assets.
Here’s my advice: Don’t get into a mortgage payment that takes all your resources. The banks want the loan. Don’t buy “as much house as you can”. I know, houses are getting bigger and bigger. We don’t need that much space, it is just more house to clean.
Another reason not to buy a house that takes all your resources is that it won’t only consume your financial resources. It will also consume your time because you will have to continue to work to make the payments, upkeep and repairs.
As home prices rise, I know people who are worried that they will never be able to afford a home. But there are options and alternatives. These alternatives are not sexy, but they are doable and will help create a secure future where you can invest your money and your time where you like instead of being chained down by a mortgage. Some of these options include:
- Buy a smaller house in an older neighborhood
- If you are handy, buy houses that need repairs, live in them while you rehab and sell them for a profit. You can keep this as low key as you want
- Build a tiny house
- Live with family and help pay the mortgage or split the rent
- Buy a house and rent out rooms
- Rent and save
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