The Housing Market Crash
In recent years, the housing market has fallen drastically. No longer is it the case that buying a house is looked at as being an investment in your future. Instead, the benefits and disadvantages of home ownership need to be carefully weighed.
For instance, you should never buy more of a home than you can afford - even if you believe you’ll be able to afford it more easily in the future. In fact, this would not make good sense at all in our current economy. You need to be flexible and able to run with the punches. Even top financial guru Suze Orman is advising people to think again before purchasing a house. She wants potential buyers to save at least 20% for a down payment—and that’s on top of having an 8-month emergency fund saved up.
That can be difficult news for someone wanting to purchase property. After all, part of the American Dream involves home ownership. It can be difficult for those who have grown up believing you get a job and buy a house to swallow the hard fact that home ownership not only isn’t realistic for them, but that the dream of owning a home might also be counter to long-term financial well-being. Here are some times when you will not want to buy a home.
You Don’t Have an Emergency Fund in Place
$24,000. Does that seem like a huge amount? Have you sat down with your finances and added up how much you will need to have in your 8-month emergency fund? If you’re thinking of buying a house, you’re better off planning for monthly expenses based upon the expenses you will have when living in that house.
To determine your monthly payments, look first at all sources of your monthly income. Your monthly house payment should not exceed 30% of your take home pay. This way, you will leave yourself with enough money for other monthly expenses. Nothing is worse than having a big house and no money for food.
You’ll want to add up the monthly house payment, homeowner’s insurance payment, property taxes payment, utility bills, cable/phone/Internet bills, grocery bills, life insurance, health insurance, car payments, etc. Anything you spend money on each month needs to go in that amount. Don’t use the average, use the highest you have paid. Now multiply that total by eight. That is the minimum amount you should have in your emergency fund. You get bonus points if you have twelve-months of living expenses saved up.
You Have Debt
Student loans are one thing, but if you have credit cards, short-term loans, or the dreaded payday loans in your name, chances are that you have been overspending and living beyond your means. Even if you have good credit, if you are carrying balances on your credit cards, you should think twice about owning a home.
This is a dangerous tango. Why? Well, imagine the worst-case scenario. All of a sudden, you’re in your lovely home, but you lose your job. Now, your mortgage lender will often work with you—but the creditors? Not so much. In fact, if you fall behind on credit card payments, it could put your home at risk. Creditors may put a lien on your home. Plus, using credit cards to pay for things you cannot afford (if you could, you wouldn’t be using credit cards, now would you?) is a really bad habit to be in.
Not only that, if you are saying to me, as you read this, “But it’s stuff I really needed that’s on the card!” I’ll say it again. You cannot afford a house. Home ownership comes with all sorts of expenses—property taxes, homeowner’s insurance, furniture, remodeling, plumbing, other maintenance issues. Remember, you have a landlord right now who takes care of all that stuff for you. You’ll be responsible if you own the house.
You Don’t Have 20% Saved for a Down Payment
You cannot dip into your emergency fund for your down payment. That would be a huge error. What would happen if the week after you moved into your home you lost your job, had an accident, or got sick? All of a sudden that home would be at risk. No, you need to save up at least 20% of a home price for a down payment on your home on top of your emergency fund.
That doesn’t mean taking advantage of a “nothing down” agreement and that doesn’t mean 5%. In order to really sink your teeth into home ownership and be comfortable in your home, 20% is mandatory. It will also make your monthly payments more manageable. Consider this scenario: You’re purchasing a $95,000 home at 20% down or $19,000. Your monthly mortgage payment would be $390. If you only put 5% down, or $5,000, your monthly payment would be around $460—about $70 more. That might not seem like much now, but in a tight month, you’ll be wishing you had that extra $70 for gas in your car.
Also, if you stick to this rule, you’ll be less likely to go over your budget for a home. Yes, that gorgeous $250,000 home might be something you can qualify for, but if all you have for your down payment is $19,000 you better think again. It will really stretch your budget to own the other home.
You Might Move in a Few Years
If you’re going to move in a few years, you better forget about buying a home now. In fact, if it’s even a possibility, don’t do it. Selling a home is a real chore, especially in the current economic climate. If you might be transferred for your work or if you might be laid off, you might want to think again about buying a house. If you might return to school—even if it’s a remote possibility—hold off. Not only do you risk having to pay capital gains on your home sale, but if your move is time-bound and your home sale isn’t cooperating, you could be in quite the bind.
You Are in Your 20s or 30s
Even if moving or the prospect of moving isn’t on the table, if you’re younger it might come up especially if you’re single. More often, people are having to move around more due to job relocation, job loss, marriage or family issues. If you’re in your 20s or 30s, work on saving up that nest egg instead of working on owning a house. By doing this, you’ll be ready for some of the changes that may occur (or the sudden decision to attend an MFA program across the country) and you won’t be tied down to a mortgage.
When Should You Buy a Home?
You should buy a home only when you meet Suze Orman’s criteria and when you will be living in the home long enough to make it profitable for you. When you buy a house, it should be with the expectation that you will live in that house for the rest of your life. The pull of feeling like you should own a house rather than rent is very strong, but if you want to avoid major financial catastrophe, it is important that you very carefully consider all the benefits and downfalls of buying before you are truly financially ready for home ownership. It’s a big responsibility.
Orman, S. (May 2011) “Should You Rent or Buy a Home” O, Oprah Magazine.
“Is it Better to Buy or Rent?” (May 11, 2011) New York Times.
Image courtesy of https://www.sxc.hu/photo/1341259.