Take a 2-question test to see if you're ready to own a home
Interest rates are low, the housing market remains hot(ish) and it’s home-buying season. Prospective homeowners all over America are licking their chops for a piece of the pie. For those folks who are going to complete the buying process without any savings left after closing, in the words of Public Enemy's Chuck D I say to you, welcome to the terrordome.
"But Pete, I just got approved for a mortgage, and we didn’t even have much money to put down,” you retort. I know. You’re now making my point.
Getting approved for a mortgage isn’t the accomplishment it used to be. There was a time in which a mortgage approval was a rite of passage. It meant you had arrived. Now? It means some institution is willing to take a few payments from you.
Don’t exhale upon closing on your new house, as though you just finished a marathon. It might feel like you did, but in reality, there should be a guy standing there in a funny hat telling you the race is actually 100 miles longer. When you own a home, you own its problems, too. The roof is your problem. The furnace is your problem. And the thousands of other structural components and functional contents are your problems, too.
Can't afford 15-year mortgage? Then don't buy
For some ridiculous reason, my home has two faux chimneys. They are both leaking. Do you know what my call was like to the repair company? “Hi, I need my fake chimneys repaired.” Two pointless fixtures are costing me thousands of dollars. I’m frustrated, but if I didn’t have an emergency fund, I’d be in trouble, in spite of my ability to afford my mortgage payment.
Being able to afford the monthly mortgage payment is not indicative of your ability to afford homeownership. Just because a billion-dollar financial institution lets you do this to yourself, it doesn’t mean you should.
If someone asks me whether they can afford to be a homeowner, I ask two simple questions.
- How much of a down payment do you have?
- How much of an emergency fund will you have after the down payment?
I can map your financial future from there. I don’t need a crystal ball. If you don’t have a down payment, which you saved organically on your own, without assistance or borrowing, how are you going to afford the furnishings, landscaping and planned obsolescence of household appliances? You aren’t. You will go into debt. Or, you can choose to not address important maintenance issues, which of course leads to bigger problems down the road, especially when you finally sell your home. There’s nothing quite like being told you need $10,000 in repairs to prepare your home for someone else to live in.
Down payments can arrive on the scene in several different incarnations. I’ve seen folks borrow from their 401(k). That move usually makes me physically ill. Some receive a loan/gift from family members to place the seemingly last piece in the puzzle. If you have to finagle your financial life around to summon a down payment, then you can’t afford homeownership.
Don't try to buy a better credit score to buy a home
I 100% acknowledge my assertion would crash the economy. If people only bought items they could objectively afford, our economy would crash faster than me on a unicycle. The entire sub-prime lending complex was designed to grow the market of borrowers. “Let’s extend credit to those folks who we shouldn’t objectively lend money to,” I’m guessing the softball team’s jersey’s read. It’s a gut-wrenching feeling to know that if Americans made good decisions, our economy would be destroyed.
Homeownership only solves financial problems of those who can objectively afford it. When executed properly, homeownership will help you eliminate a major living expense, upon paying off the mortgage. Renting can’t do that.
One of the primary arguments against renting is the rising cost of rent. That’s a valid point, but when my rental property’s air conditioner goes on the fritz, I’m the one that sweats, while my renter gets to pump his fist in a new especially cool environment.
I want you to be a homeowner, when you can objectively afford to be one. I don’t want you to find yourself caught up in a societal tidal wave that blindly delivers you into financial hardship. There are tons of reasons why homeownership is great. I’m just not interested in exploring them today.
You’ve seen the billboards along the highway that boldly announce, “You could own a home for what you pay in rent.” I often daydream that a windstorm destroys them in one fell swoop. But then I remember my home could be damaged by the same storm, and then I’d have to pay for the damage.
Peter Dunn is an author, speaker and radio host. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com