Owning a home is a dream of some people, but there are many that either feel like it’s impossible for them to achieve it. I will say up front that I don’t think home ownership isn’t for everyone. If you’re not willing to put in the legwork and run the numbers, it can be a huge financial and emotional burden.
If you’re really intent on buying a home, taking the time to get a financial plan in order can be a huge step in helping you reach your goal. It can also provide you a way to make home ownership a relatively enjoyable experience.
Keeping Total Housing Costs 30% or Less
When we first were married we had a desire to own a house at some point in the future. At the time however, we knew that we weren’t financially or emotionally ready for the big responsibility. We focused on handling that first before we even gave serious thoughts to house hunting.
The biggest financial preparation was getting into the mindset of living off of one income. Even though we’ve been a two income couple, we felt that living simpler and below our means would help us reach some of goals quicker. At the time, they included:
- Having a decent size emergency fund.
- Pay down high interest debt (like my car loan)
- Have some savings set aside for a house down payment.
- Have wiggle room in the budget to go on some vacations and eat out a bit.
It would’ve been impossible if we tried to do it all while having our day to day budget be based on both incomes. I was an intern at the time, so it made sense to us to base the family budget on my husband’s pay. We’ve done our best to keep to this system.
When we were looking at a house to buy, we also made the choice to focus on only one income. For us, it meant that we focused on keeping the numbers based on net pay, not gross income. While we could’ve looked at more houses in “our price range”, we decided to stay within our self imposed limits. It gave a us measure of comfort, knowing we were having a bit off buffer with our finances.
Another reason for us to be conservative was our goal to have a reasonable interest rate with our mortgage. We knew that in addition to the down payment we’ll put down, the lenders were looking at a couple of other numbers to determine the interest rate they offered.
Debt to Income Ratio
Having a high amount of debt can ruin your chances of getting a loan. Lenders want to know that you can make these payments for years down the line and your debt to income ratio is one thing they analyze.
Your debt to income ratio is calculated by simply taking all your debt (student loans, credit cards, car loans, etc) and dividing that amount by your income. You want to make sure your ratio is lower rather than higher. If your debt to income ratio is higher than 36%, you could have a hard time qualifying for a mortgage.
Loan to Value Ratio
Another reason to take your time and build a down payment is the loan to value ratio and how it affects your chances of getting a mortgage. The loan-to-value (LTV) ratio is basically the mortgage loan amount you’re hoping to get divided by the appraised value of the property you’re considering to buy.
Your Other Financial Goals
This is important becuase lenders and real estate agents don’t figure this into their calculations. Your lifestyle will be affected significantly unless you plan accordingly.
- Do you have enough to save for retirement?
- Can you stash money away for your child(ren)’s college fund?
- Can you go on the vacations you want to go on?
What If You Really Want to Buy a House?
Buying a house can be a great financial and personal goal to have if you prepare ahead of time. You have basically have some options to look at carefully before you make a final decision.
- Be patient and wait a bit until you buy your house. Give yourself more time to have a bigger down payment. This will lower your mortage loan amount you’d need. Prices could stay lower than normal with unemployment problems continuing.
- Focus on getting a starter home. You can still buy a home, but you might consider getting something a bit more inside your price range, so you have bigger amount of wiggle room. If you’re buying your first home, a starter home can a better option. You may upgrades years down the road or you might find you like the house and stay.
- Go for the home. If you’re in a position to get the home you want, that’s great. Just make sure you double check it is something within your budget. Otherwise, consider the first two options.
Our Essential Housing Expenses
If you’re thinking about being a home owner, here’s how our current housing costs break down to give you an idea of what to expect:
- Mortgage $ 661.57
- Escrow * $192.18
- HOA Fees $112
*Our escrow account takes care of homeowners insurance and property taxes.
Of course the numbers will be different for everyone, but it’s good to get an idea of what actual people are paying. Some may note we don’t include home repairs that may come up from time to time with our calculations. We have done is set aside savings which includes covering such expenses. It’s a new community and so far we haven’t had to make any big repairs. Additions such as adding ceiling fans to the rooms are done on a cash basis, we plan ahead for the small projects and save money up for the purchases.
Currently our housing expenses have been steady. The only big purchase we had to make since we bought it was the washer and dryer set. We bought those used off of Craigslist and they had served us well. Once they both stopped doing their washing and drying properly (2 cycles sometimes), we bought another set with savings we had set aside.
Thoughts on Buying a House You Can Afford
How did you how much mortgage you could afford? Did you rely on the estimate from the lenders or did you run the numbers yourself? Did you receive any pressure from your real estate agent to get a more expensive house? If so, how did you cope with it?
If you’re a home owner, what kind of mortgage did you get and why?
Photo Credit: Images_of_Money