Don’t Rush Your First House Purchase

PROBLEM #11: It costs so much to buy my first house.

House in winter

Perhaps you’ve heard this lament uttered by those who are still renting. Maybe someone is trying to convince you that putting only 5% down on your first house just to get into the market is a good financial decision. This is what I did. My wife and I were able to make it work, but it was certainly a financial mistake that I don’t encourage anyone to repeat.

 

 

Please, I urge you – DO NOT, under any circumstances, put less than 15%-20% down on the purchase of a house. If you do, the private mortgage insurance you will be forced to buy will be a significant part of your monthly mortgage payment. Also, focus on houses where the total mortgage payment will be a third or less of your monthly take home pay.

Let’s look at an example. Bill (just a random name – could be your name) makes $55,000 a year at a decent job. Bill knows how to budget. (see what could be his fictional budget here) From his budget, he has a surplus of just over $1000/month. His rent may be a little high – $1050 – but we’ll get to that.

If Bill wanted to buy a house with a mortgage payment – including escrow – that was the SAME as his current monthly rent, he would be able to borrow approximately $140,000 or less.

$662 – principal and interest

$350 – taxes and insurance (don’t forget this part of the monthly payment)

$1012 / month – total mortgage payment

Keeping this number ($140k) in mind, Bill can look for houses that are priced from $140k up to $175k. If he were to find a house at $175k, he will have to come to the table with a 20% down payment to maintain his $140k mortgage loan. This is the problem for many first time home-buyers. How can someone save $35k on what seems like a “meager income”?

How can I save a large down payment on what seems like a “meager income”?

Let’s break it down. Savings jar with changeBill has $1k extra per month. If he were to save all of that extra (i.e. – no debt), it would take 35 months – almost 3 years – to be able to afford that first house. But, what if Bill were able to rent for less than $1050/month? If he can rent a small apartment for $600/month, he would have $450 more per month to save. This would allow him to save the $35k down payment in 24 months – 2 years. Obviously if Bill finds a less expensive house, he could save the down payment in less time. This is what I would encourage. Try to buy as little house as you comfortably can – and not the most house you “can afford”.

Always buy less house than you “can afford”.

If you buy more house than you can afford, or rush into a house purchase without a sufficient down payment, you are asking for trouble. There are always other expenses (closing costs, maintenance, repairs) associated with home ownership. These extra costs can quickly add up, and before you know it, you’ll be “house poor”.

In case you were wondering – there is no quick easy way. Achieving a financial goal like purchasing a house, requires hard work and dedication. But, by making a life change (moving to a less expensive apartment), you can accelerate your success. Patience, Patience, Patience. You have to be willing to wait.

Any debt (credit cards, student loans, car payment) you have will only slow down your timeline. That is why it crucial to eliminate debt and also the temptation to borrow any more.

Financial freedom and success is a process, not a one-time event. Click To Tweet

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-Chris

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