So people ask me the question all the time. “What is the right financial status to buy a home?”
It’s a good question and if you ever had that question in mind, it’s a great mind state to be. It’s also a sign that you are a responsible person from a financial stand point.
There are 2 types of home buyers from a purchase money source standpoint:
- Cash buyers
- Home loan buyers
Cash buyers typically do not have this type of worry. They typically fall in the affluent group of people. The question for cash buyers is usually what type of home their budgeted cash covers.
However, home loan mortgage buyer have to worry about what monthly mortgage payment they can afford with other housing expenses. A few years back, predatory lending practices discouraged people from worrying about that because of home value speculations.
It goes like this, “buy low and sell high.” They encouraged people that they can squeeze their finances even if it’s unhealthy because the home will sell at a higher value. You probably know the end of that story.
There is a major problem with that type advice because it did not account for overbought/oversold and overvalued and undervalued marketplace. Therefore in 2008, many families ended up under water due to the massive market crash.
To answer the question, first it really depends on if the home to be purchased is a primary residence or not. If it is not, I will expand on the answer for non-primary residence on future posts. For now, let’s focus on primary residence.
We all need a roof over our head. As an adult, you probably pay rent already anyway. There is and/or should be a housing budget in your finances anyway.
With that being said, typically in a conventional loan, the bank wants to see between 25% – 28% of your income as your affordability for housing expenses. 30% is a push and should be avoided.
Your monthly mortgage payment, including taxes, insurance and other fees, cannot exceed 28 percent of your gross monthly income.
If you make $100,000 per year:
- All you can afford per year for housing is $28,000.
- All you can afford per month for housing is $28,000 divided by 12 months = $2,333 per month.
When you buy a home, making sure that your monthly mortgage payment is not above your affordability is key to an enjoyable home ownership. When you follow this rule, you become immunized against real estate market movement.
In a case in which you have to sell, you will avoid the pressure of overpricing your home. You can get talked into buying an overpriced home because the average realtor/loan officer only care about instant commissions. Be careful!
As a homeowner trying to see, overpricing a home only does one thing. The house sits on the market and does not sell in 180 days while you continue to ring unwanted expenses. A market crash will not put you in a state of emergency if you follow the 28% rule.
When you break that rule, you are essentially buying an overpriced property. There are a million ways that you are now exposed to over 1,000 home ownership crisis which can include foreclosure, bankruptcy, negative equity etc..
I hope this has been helpful for you and your future home ownership endeavors. Please share this post with your contacts and social media connections. All referrals are highly appreciated.