I see the advice all the time not to buy a house if you can’t afford it, but rarely do I see a good explanation of what that means.
It’s really easy. Let me explain it, as someone who paid off a 30-year mortgage in five years and now co-manages rental property and has to determine if someone can afford to rent from us or will be over their head. And no, just because I’m a landlord doesn’t mean I think everyone should rent. There are definitely times when buying makes sense.
How to determine if you can afford the mortgage: It’s easy. Is the payment, including the mortgage principal and interest, taxes, and insurance, more than the net (before taxes) pay on your weekly paystub? If you don’t get paid weekly, just do the math. If you get paid every two weeks, divide that number by 2. If you get paid monthly, divide it by four.
Just do a Google search on mortgage calculator to estimate those figures. If you don’t know what taxes and insurance go for in your area, ask a homeowner. You need those figures to plug in to the calculator. The property taxes on my house would be another $150-$200 per month if I lived across the river in Illinois. That would have been a dealbreaker on this house.
And let me tell you something: I went right up to that budget limit when I bought this house, and some months were tight, especially at first. Banks seem to go to extremes. If they’re willing to give you a loan, they tend to be willing to loan you considerably more than you can afford, so don’t do it. If I’d listened to the bank, I would have lost that bigger house in the mortgage crisis.
Don’t forget the other stuff. It’s never just a house. Never. Ever! You get in a new house, and then you “need” new furniture. I see it all the time when people move. A moving truck comes in, and then within the next week or two, here comes a truck from the furniture store. Furniture can be expensive. It’s one thing to pick up a $200 couch for the living room. It’s another when the couch turns into a $2500 living room set, and yet another when it turns into a living room set plus an entertainment center plus a new big-screen TV plus a dining room set plus a little something else.
You’ll probably also need some appliances, like a washer and dryer and a fridge. I spent about a thousand bucks on appliances. Had I bought used stuff, I could have spent about 1/3 of that and been just as happy.
Map out what you need and what you just want, buy those things in that order, and spend conservatively. It’s better to have a basic white fridge and a $200 couch and a $130 TV from the pawn shop in a house you can afford than to lose it all in a couple of years because you couldn’t make the payments.
Don’t get in over your head changing stuff. I’ve seen a lot of foreclosures, and the story is always the same. Someone bought a house that isn’t up to HGTV standards, started remodeling the kitchen and the bathrooms, started replacing floors, ran out of money at some point, ended up with a bunch of unfinished projects and lost the house. Then they became some investor’s unfinished projects and the original purchaser has nothing to show for any of it.
Those types of projects are never as easy as they look like on TV, and they always cost a lot more too. When I have a project going on, I’m going to the hardware store at least once a week and I can count on dropping $50-$100 every time. This is for the stuff that takes care of the complications you run into, not the big-ticket items in the project. I’m talking stuff like construction adhesive, caulk, putty, screws and nails, tape, the extra can of paint.
Get a house you can live with as-is for a while, get the other stuff it takes to make the house livable, and save the big projects for after you’ve been in the house a year or two and know what your budget is going to be. Then when you start, start with a small project, get it done, make sure you learn one thing doing it, then move on to the next one. Challenge yourself, but don’t overwhelm yourself. Sometimes this is the tipping point on whether you can afford it. This piece is at least somewhat optional. The next isn’t.
Don’t forget emergencies. It seems like every year, on average, I sink around $500-$1000 into a house keeping everything in good enough repair. There’s a lot that can break over the years: the furnace and air conditioner, hot water heater, roof, washer and dryer and kitchen appliances. None of those needs to be a crisis, but if you’ve spent all your money tricking out the house, it can be. And routine maintenance isn’t optional. You pay for it at the end if you don’t pay as you go along. Pay for it outright instead of getting a home warranty.
When in doubt, rent for a year or two. Here’s the thing about renting: It is what it is. You won’t be changing stuff, you have a really good idea what your payments on everything will be, and if there’s an emergency like the hot water heater dying, the landlord has to fix it, not you. So your expenses are a lot more predictable. Plus it’s easier to get approved to rent than it is for a loan (trust me on that). Look at some houses to figure out what you like. Rent the one you like the best, learn what you can about taking care of a house, and build up your credit score. Pay all of your utility bills on time. Get a credit card with a small credit limit, like $300, use it, and pay it off every single month to build up a credit history. If you buy furniture, buy stuff that you’ll be able to use when you get a house of your own. Go for timeless over trendy.