Buying a House You Can Afford is a Key Financial Move

Crosswalk lists seven common home-buying mistakes couples make during the early years of marriage as follows:

1. Assuming property values will always go up.
2. Being blinded by emotion.
3. Too much window-shopping.
4. Trying to “win.”
5. Counting on raises.
6. Overspending.
7. Getting the wrong loan. 

To me, this is a pretty good list, and not just for couples. Most buyers could learn something from the seven items above. And since what they say works well with my formula for buying a house, I'll give it a thumbs up. ;-)

The key is #6. If you overspend on a house (in other words, buy a house you can not afford), doing everything else right probably won't save you. And if you buy a house you can afford, making a few other mistakes along the way won't hurt you that much.

Comments

[Moneyandpf]

FMF,

Just curious when did you purchase your 1st home (At what age)? I see you try not and purchase a home that is twice your combined income. As a young one (23) it could be years before I have 20% for a down payment because I fully fund a roth, contribute for % match on my 401k, etc.

Just interested to hear your thoughts especially towards younger couples who are just getting started off. I plan on buying in 3 years and plan to have at least 10k saved up and hopefully more.

[rwh]

I remember a couple of years ago on this blog I commented to another poster who was about 35, a first time home buyer, living in the SF bay area who had listed all the reasons why he/she should take the leap and buy a place with little or no down payment that was far more than he/she could afford. His/her main motivation was rapidly escalating price increases.

I suggested if they couldn't put 20% down and get a fixed rate mortgage with a payment that fit their budget, don't buy and rent instead, particularly since monthly rents were a fraction of new mortgage payments on similar properties.....a sign the market was fundamentally out of whack. The poster also had no interest in moving farther out of the bay area.

I wonder how that worked out.

[savvy]

I think that's excellent advice. For couples, I would suggest only buying as much house as you can afford on ONE salary. This will leave plenty of cushion in your budget.

[7million7years]

8. Breaking the 20% Rule

This is a rule of the Rich; having more than 20% of your Net Worth in your property means that you are 'robbing' your investment portfolio .. hence your financial future. Don't do it!

[Traciatim]

I noticed in the article it states "They find themselves with fixed debt higher than the maximum 36 percent mentioned earlier" . . .

I couldn't find in the article where it mentioned the 36% figure. I'm in Canada and we may have different rules, we use GDS and TDS as guides. Your GDS is your gross debt to service is your total cost of your house, heat, and property tax. This figure we're guided to keep under 32% of your income. TDS is your total debt service ration, and that is guided to keep under 40%. This will include all debt.

From the article it looks like they are saying 36% should go to your mortgage, which I think is far too high. If people could just stick to the 2.5 times income rule (or somewhere between 2-3 times income) for your home price then things would be far better off.

I still don't get some of the stories of people who are making 35K buying 500K houses on ARMs and then whining when they can't afford it. Get a grip on reality.

[Amy86]

The aforementioned 36% rule is in part one of that article "Should we buy a house" (there's a link to it at the top of the article). It states: "Divide your fixed debt (The mortgage you’re considering, credit cards, student loans, car payment – anything that requires long-term payback) by your gross income (before taxes and deductions)... To pass muster with most lenders, the percentage generally should be under 36 percent, preferably under 30 percent, and as close to 20 percent as possible. Still, some lenders will allow up to 45 percent, depending on the applicant’s credit score."

I assume the first part of the equation refers to the total monthly payments for your fixed debt, divded by your monthly gross income.

[FMF]

Money and PF --

I bought my first home (a condo) at age 26. It was priced under two times my annual income.