Many of the folks who shunned renting in order to buy a house for which they qualified, but objectively couldn’t afford, have already learned this tough lesson. And if they haven’t, they will. Affording a home is never solely about the payment, but even the payment part is often mishandled.
Your housing budget should account for no more than 25 percent of your take-home pay. For a homeowner, these expenses are limited to mortgage payment, property taxes, homeowners association fees, and homeowners insurance. For renters, the expense is simply the rent payment. For example, if your household take-home pay is $4,000 per month, then your housing expense should be right around $1,000 per month.
If 40 percent of your monthly take-home pay goes toward your mortgage or rent payment, then you are considered to be overhoused. Being overhoused is a very serious problem, especially if the affected individuals are also dealing with consumer debt.
When over 40 percent of your income goes to just one expense category, then it’s very challenging to fund all your other priorities, including saving for the future. Overhousing can be solved by either moving to a less expensive home, or by greatly increasing your income.
Too often, potential homeowners try to justify a housing purchase by comparing their hypothetical mortgage payment to their current rent payment. This is a mistake for several reasons. What’s to say the amount of rent they are paying is the appropriate amount in the first place? If it’s much over 25 percent of take-home pay, then switching to a house won’t solve a nonexistent problem, it will cause one.
Additionally, people shouldn’t commit to home ownership, unless they can commit at least five years of their life to that location. The housing market’s ebbs and flows, as well as real estate fees, make it difficult to break-even in such a short time frame. The final true qualifying marker for homeownership is a 10 percent down payment.
While a 10 percent downpayment certainly is an arbitrary number, if a person can’t scrap together 10 percent of the value of the home they are buying, how can he/she afford to own the home? Homeownership is inherently expensive. Besides the higher utility costs, routine maintenance costs, and inevitable property tax and insurance cost increases, major appliance or structural repairs can ruin just about any financial life.
A poor housing decision is one of the main causes for increased financial stress. Home-buying decisions can become emotional, but doing the math and keeping your head will prevent your emotions from creating decades of financial stress.