First Time Home Buyer, Make Your House a Blessing

My wife and I rented much of our first ten years of marriage.  We are currently in the process of looking for our first home, and have become sticker-shocked at housing prices (yes, even after they have lost some value recently).  The target amount we had in mind does not translate to enough house for our family, so I went back to the drawing board to determine how much house we could really afford. I discovered that mortgage lenders have their own set of rules, and if you followed their rules, it could leave you house poor.  After running the numbers, I’m starting to think there is nothing wrong with renting a house indefinitely (my wife may not agree)!

The 28/36 ratio - the 28% rule. Banks and mortgage companies would like for your new housing payment, including taxes and insurance, to be less than 28% of your gross monthly income. That means a family earning $50,000 a year should not spend more than $1,167 on housing. That number seems a bit high to me, considering after taxes the family is only bringing home around $3,300 a month. When you subtract other payroll deductions, such as health insurance, FSA contributions, etc. that does not leave much disposable income after an $1,100 mortgage each month.

The 28/36 ratio - the 36% rule. In addition to the 28% rule, mortgage providers also use a 36% debt-income ratio based on monthly income and debt expenses. Using the same $50,000 per year example family as before, their total debt payments each month (including the new mortgage) should not exceed 36% of their monthly gross income, or $4,167. If we family fully maximized the 28% rule and took out an $1,100 mortgage that would only leave $400 in additional allowable debt payments to stay under the 36% rule. A couple credit card payments and/or a large car payment could easily push us over the 36% rule.

The bottom line?  Mortgage companies offer the 28% rule and 36% rule as a guide for their own lending rules, but it does not mean you should fully take advantage of their offer if you don’t have to.  Some of the best advice I ever heard for young couples is to buy a starter house and stay there.  Do not give in to the pressure of buying more house than you can comfortably afford.

Photo courtesy of The Jamoker

Renting a House Smart Move for Newlyweds

Ever have someone tell you that renting is like throwing money away?  Yeah, us too.  Since we got married we’ve been on a quest to buy a home, until one day I realized it may make more sense to rent a home until we are more financially prepared. 

“Homeownership is the American dream.”

I know it is, and a noble one. However, it is not wise to dig too deep a financial hole for yourselves early in a relationship. The first couple years of marriage are tough enough without struggling to meet a mortgage payment. The average homebuyer commits thirty years to a mortgage payment of nearly $1,000 a month. Thirty years is an awfully long time to commit $12,000 a year (or more). Consider renting the first six months to a year to get to know each other, and the area where you decide to settle.

“Renting is like throwing money away every month.”

This is a popular idea sold by realtors, mortgage brokers and banks. There are many times when renting makes the most financial sense, particularly when you consider the costs and added risk of mortgaging a house. My newlywed friends have some debt to pay off, and have very little in savings. Just because they technically qualify (according to a bank) for a mortgage loan doesn’t necessarily mean they should take one.

“If we rent, we won’t be building equity.”

Building equity in a home is not the only way to grow your net worth - there are plenty of other investment opportunities. Some could make the argument after the recent housing bubble burst that real estate is no longer a “sure” investment, even though I believe over the long term it is certainly safer than others. Think about it - there will always be new companies, new technologies and new services created over the years, but as far as I know we haven’t figured out how to invent new land. It is this limited supply that causes real estate to appreciate at a fairly reliable rate over the long term.

So renters cannot participate in this appreciation. Worse things could happen if you buy without adequate savings established. You could buy more house than you can afford and eventually be forced into foreclosure. You could buy a house that requires costly repairs at your own expense (versus passing the repair bills on to a landlord). You may be required to buy private mortgage insurance on top of your payment, homeowner’s insurance and taxes, making for a costly monthly payment. The potential negative consequences for premature homeownership are endless. Conversely, renting frees you from many of those consequences. You do not need to worry about large repairs, taxes, PMI, and homeowners insurance (although renter’s insurance is a good idea to protect your contents).

“But rates are at an all-time low.”

Even the lowest rates don’t make sense if you are really stretching to take on a mortgage payment that you cannot afford. Consider lowering the bank’s suggested 28/36 debt-to-income/obligations ratio to a more comfortable level based on your income. In the book The Ultimate Cheapskate, author Jeff Yeager advocates “buying a starter home and staying there.” Over time you may make improvements to the home, or expand if necessary, but your goal should not be to trade up every few years, a practice that continues to push your mortgage payments further into the future. I personally think this is great advice, and something many newlyweds should strive for. If you cannot initially buy a starter home, look for a starter rental and move up when you can, but then stay put and pay off your mortgage early to speed up your plans for financial freedom.

Photo courtesy of Editor B