When they say "A home is the biggest investment of your life..!" They weren't kidding. It is! As you can see now what is ocuring in our economy today...it should never be taken or treated lightly as people were doing. A sudden illness, job loss can turn your world upside down. I recently heard of a friend speaking of a couple that just recently lost their home. Both the husband and wife lost their high paying jobs. They had no reserves. They lived in such a "Big home, drove a big car, and lived a big lifestyle!" At first glance, you would believe they were very well off, but it was a mirage. It was all done on credit.
Sometimes you sit back and are overwhelmed when you hear stories like this, but I no longer do. I am not cynical, a better word is that I am 'numbed to it!' I really think that too many persons lived way beyond their means and needs and what we are witnessing in our society to day is the price many are paying for the financial distress. As a parent would tell a child with too much food on the plate, "Your eyes were bigger than your stomach!" So too is the predicament that many home buyers placed themselves in. They placed themselves and their future in harms way. This is really a pretty common place story in America today. They did not anticipate income, their real financial obligations in life, increases in mortgage payments, taxes, utilities and even increases in the cost of gasoline. It was a true recipe for disaster of epic proportions.
Compulsive gamblers get a thrill by pushing the envelope a litter further than they should, and get a rush when they beat the odds. The difference is that many compulsive gamblers take calculated risks. They make their moves based upon certain known facts and odds. Unlike many homeowners that may be foreclosed on...many of them moved into deals that could never work out for them in their favor.
A budget could have laid out everything for them even before they went in on the home. A home should never be purchased on impulse or whim. The ability to buy a home, does not mean you should move forward. Down payments, monthly payments are only part of the big picture. There are many other monthly expenses that have to be allotted for in a budget. The math never lies. Before a person buys a home is the time to look at the math, once you are in the home it is pretty much too late. Many persons are finding this out the hard way that you cannot flip an expensive home in a six months or a year if every one of your neighbors are trying to do the same thing too.
This is especially true for first time home-buyers in a shaky economy and high unemployment.. Before you buy a home have a plan! make sure it is your plan...one that you are comfortable with and do not feel you are pressured into it.
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Start with the right mortgage that you can afford. A mortgage payment is one thing, but the reason a 30 year fixed rate became so popular after the last great depression is that it is a budgeted mortgage. It provides a fixed rate payment for the term of the loan. Principal, Interest, Taxes and Insurance are all provided for. If you know that your payments are for the next 30 years, you can plan around it. The secret is you pay it down, and NEVER borrow against the equity! Don't have enough money for a down payment? Get a second job! Try to put down the most possible, again...pay it down.
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Assess Your Finances. Once you know what your monthly payment is now you can look at all the other items in your life. Income, taxes and expenses. Some expenses may be fixed, and others will fluctuate. It is the monthly expenses that are most important. Sometime they are not constant. In summertime the air conditioning usage will be higher, and so will your electric bill. In the winter Your electric bills may go down, but your gas or oil bill will rise due to heating. Water usage may rise. There are many fees that are necessary and others that are not.
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Know Your Financial Obligations:Home insurance, electric, gas, sanitation, water and sewer will fall into this category. Cable tv is optional. Then there are expenses of home maintenance, auto payments, car insurance, hospitalization, the cost of maintaining a cars(s), fuel, car insurance, registration, parking tolls, food, medical, personal care, taxes and more. On top of this is you should have a good nest egg or an emergency fund. I would suggest at least 6 months in the bank!
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Hi Jim...loads of good old Common sense.
Great post :O))
Great, great advice, Jim. Unfortunately, even with a budget and responsible buying, unforeseen circumstances can negate everything. Both spouses losing their jobs in this market is one of those circumstances. Getting other high paying jobs may take time or never happen. 6 months in the bank is not going to be enough. Happened to friends of mine in the U.K. The husband lost an extremely high paying job and was out of work almost one year. He just got a job, one month before they were going to lose the house. Lower paid, but enough to keep them solvent.
Victoria Oak Bay Realtor Fred Carver 250-598-2963 for Victoria Oak Bay Homes (Re/Max Camosun Oak Bay & Surrounding Area Real Estate) Fred, the amazing thing in the last few years and even now...no one is really using it.
Jane Peters Los Angeles Living, Los Angeles Homes (BRC Realty Group) I think it was unforseen because it was not looked at. However..if a person had a budget and actually looked at it. 100% down on a ARM, no reserves and two car payments was not a very smart or prudent thing. There were many deals that persons should not have goine into at all. In fact it was rather foolish and risky. No one can tell me there was any planning involved in so many deals like this.
I guess it is not just the 6 months....it is also a combination of other things as I mentioned. It used to be 25% down and even in the 1980's yes there were foreclosures...but persons could hang on to their homes longer.... now a days...there is no buffer whatsoever to absorb any calamity. A home is lost within months. Also, a persons purchased way beyond thier means. The McMansions took a ton of money to maintain. Landscaping, heating them, furnishing them. Many of my friends had these magnificent gourmet kitchens they never used because they ate out every night.
Many folks simply never learn how to play the game of "how much can I accumulate in my savings account".
Buyers should go for budget counseling before buying a home . Great post. Congratulations on being featured.
at this time only the VA uses residual income in qualifying. Residual income is that which is left over after all expenses.
your monthly payment on a fixed rate mortgae is not fixed, as the taxes and/or insurance can/will change annually, and usually not down. A first time homebuyer may want to consider if they can afford 110-120% of their starting payment over the next 3-5 years.
how do you budget for home costs, things that need to be fixed/improved. if you have no cash reserves after closing you have a problem.
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate Lenn, it is very sad. The price they pay will be enormous for not doing so.
GITA BANTWAL, REALTOR BUCKS COUNTY, PA HOMES (ReMax Centre Realtors) Thanks! I did not know it was featured until you mentioned it.
Jay Beckingham (Allied Home Mortgage Capital Corp.) Basically they are fixed. Everyone knows a insurance premium or taxes will go up. The same thing can be said for a quart of milk or a gallon of gas. Within reason...in this country they will start charging us for the air we breath next. In my opinion, if a person has nothing left after buying to budget...they should not buy.
Jim those who are living without a budget today are on the ropes. They need to use a budget and get in shape. Although things are moving a little we have about a years worth to catch up first.
Many folks rant I need to make more money. The easiest way to make money is to curb the spending. If a person has no idea where it all goes, but makes good money, they should whip out a reporters notebook. Every purchase for a week, no matter how small, write it down. There's where the money is going. Which old formula do you quote for what a person can afford? I know I know debt ratios, what the bank or the loan program says works. But in the old days of 20% down payments or larger where folks saved for a home that cost $6000 after a war using the GI bill, still was the "one week's pay check" batted around as a ball park, benchmark. Always thought the 2.5 times of what you make a year seemed a little high in the rural small areas of America though.
Jim, I don't understand how having a bigger downpayment benefits the homebuyer. I understand how it helps reduce risk to the bank but in these uncertain times I would want to hold as much as possible in cash so that I have access to it immediately. I know I have to pay interest on the bigger loan amount but I think that's the price you pay for the insurance of having that cash reserve on hand.
I agree with Tim Maitski.
Jim, I see so many people with the large houses living house poor inside. With a budget like you recommend maybe they can take the sheets off the windows in Year One and actually buy some curtains or real window coverings.
Great post. Now to get the buyers to do a budget.....
We have all seen the mistakes made form not having a budget and sticking too it. It even happened to me in my early years. Great tips Jim!
As my father always has told me, "it's not how much you make, it's how much you keep."
I know many people who live above their means and have for years. They are fools and are robbing from their own future.
I have lived off of a "written down on paper" budget every single month of every single year since my first year of college out on my own. Those who do not live off a written budget are kidding themselves.
To Tim#13 and Lenn#14...not necessarily. There is one big factor you have both forgotten. Risk, and it is an undisputable fact that a big mortgage has added risk to your life. That price you pay for keeping the cash in your hand is very expensive when you factor in risk. Please don't fault people who want as little debt as possible. Mortgages are not the answer in every scenario. This notion that using debt as a "tool" is somehow very financially sophisticated is a load that has been sold to consumers for way too long. It is a tool, but not the best tool in many cases. It is burden in most cases, granted a manageable burden hopefully in most cases, but a burden nevertheless. I understand the home mortgage is the greatest thing to ever happen to the RE world, but let's be realistic. Isn't that what helped fuel the dilemma the RE market now finds itself in?
I am not a kool-aid drinker of this guy, but I do like his philosophies and have practiced most of them for the majority of my adult life, but if any of you know who Dave Ramsey is, he has a great line about mortgages that is simple and very true. I'm paraphrasing but it is "There is zero chance of a foreclosure when you have a paid-for house." Don't split hairs about property taxes and HOA liabilities, we all get the point and it's a good one in relating to the risk argument.
There is always another side to the mortgage "should I/shouldn't I" debate.
Jim, in working short sales I find that the American trait of instant gratification is often present. Not only is the mortgage a problem, but credit card debt is high and the too easy signature loans for cars and furniture are there too. Survival depends on the idea that there are no market cycles except up, and disaster is for the other people out there. When we counsel our clients on short sales we let them know that if they want to obtain an FHA loan in the future what needs to be done on budget in the next few years, and we make sure we ask them, do you want this to happen again?
Frank Rubi Kenner/Metairie LA Real Estate (Frank Rubi Real Estate Licensed in Louisiana) I agree! A years worth? Wow in Atlanta I would guess far more...
Andrew Mooers | Northern Maine Real Estate / Aroostook County Broker (MOOERS REALTY) YOu hit the nail on the head as usual! I do a seminar on making profit, and much of it is devoted to trimming expenses and accountability.
Tim Maitski "Video Agent Guy" (HomeAtlanta.com) An economist explained it as that the less you have in the game the more likely you will be totally upside down if any event occurs. With a 100% financing you will be less likely to weather a prolonged downturn than someone with lower payments that owns a larger percentage of equity. There is more fat stored for the winter as opposed to lean. I do agree that can say that when the rates are less than 5%, but that would not be wise advice if the rates were over 10%.
Also, the largest percentage of buyers is first time buyers. These are buyers that will have many expenses in the coming years raising children etc. Should the bulk of the money go to the mortgage? What about education, books, clothing, doctors, college?
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate I also agree with Tim on a few levels, but I am not a first time buyer, and I also feel much higher rates ahead.
Gary Woltal - Associate Broker REALTOR® Dallas Ft. Worth (Keller Williams Realty) Success starts with small actions.
Joyce & Terry Thomas Anthem Merrill Ranch AZ Real Estate (US Preferred Realty) The buyers really need to do this long before they start looking for homes.
Laura Jefferson (Acquire Real Estate) Years ago it was this way of living on a budget that saved us when a catastrophe struck. Equity allowed us to pay the bills as Ellen had to go back to work when I got sick.
Michael Myers (King-Rhodes & Associates) Great comment. I would like to share a story that you reminded me of.
I once met a person in DC who owned 12 aprtment buildings. An one of the guys in the group was telling everyone how you can make a fortune with credit. Then they turn to the guy with 12 homes. They asked him how he did it. He told them, by paying off his first home ASAP... he built up a tremendous amount of cash. He would them place large down payments on income producing properties and then pay them off and move to his next one. So America is a land of great opportunities. Some achieve, while others only dream of the possibilities.
Joe Pryor.com Realtor Oklahoma Investment Properties (Redbud Realty) Joe thanks a lot for sharing. I think what many in real estate do not talk about is the bubble. It was created over time by more, and still more lax credit. No money down created the illusion that things were well, but it was totally false. It also pushed home prices higher to levels where they do not belong. Now we are going back to a long protracted normal market. The prices will be lower, but access to credit will be tighter.
Jim, I had a thought reading your reply to me. I think your next post should be like this one but directed to Realtors and the need for a budget. You obviously get it, and it would be a great help. I have lobbied our Association for a continuing ed class for realtors on budgets, cash flow projections, amd how to put money back for a rainy day and retirement. It seems that the schools. agnecies, and Boards don't want to talk about it. I would like to see your take on this.
Joe Pryor.com Realtor Oklahoma Investment Properties (Redbud Realty) Thansk for the idea....I will consider it.
Somehow we seem to have lost the value of only committing to what one can actually afford.
Bob & Carolin Benjamin - E Phoenix Arizona Real Estate (Benjamin Realty LLC) I totally agree. Something in the core value has been lost. Buying a home is not a plan. The plan starts long before the purchase is made. A home purchase should not be made on raw impulse. As much as I would love to make a profit all day long, I am heartsick for so many persons unemployed, financially maxed to all the limits, and they are out of options. There is something major wrong with the picture. The only alternatives is to lets go back to the basics before we rationalize more foolish behavior.
I've bookmarked this post for future reading!
Thanks for getting it out to the AR community today.
PS> I love your signature........and the pen! Where did you come up with this? Email me if you would w/ info.
Patricia /Seacoast NH
I think that you need to have as much cash on hand in this environment as you can. Lending is tight and everyone including the banks are holding on to every dollar. I think you need to have a balance of down payment and affordable monthly payments.
Patricia Aulson, REALTOR Portsmouth NH Homes-Hampton NH Homes (PRUDENTIAL VERANI REALTY - Portsmouth NH Real Estate ) Thanks. The signature is old, and I originally found it on the Internet. I can no longer find the site.
James Lyon (Vista Pacific Realty) Thanks for sharing. The tough thing about the times in which we live...no one really knows what lies ahead.
Not planning is planning to fail! Not only have many home buyers failed to have an appropriate budget and savings plan, but many haven't a clue about basic house maintenance and preventative maintenance which only compounds the problem. You have to take some tests to get a drivers license and we know the way some of them drive they still didn't deserve it, so I was amazed at how just being able to fog a mirror qualified many to own a house which was a transaction costing 10 times more!
Tim, the smaller down payment (highly leveraged) only works when prices are rising quickly while the larger down payment (less leverage) always works regardless. It all boils down to how much risk are you comfortable taking. In todays economy it looks like are grandparents were correct as well as christian biblical teachings. What works never goes out of style.
Too Right-
People don't plan to fail, they fail to plan.
Haven't we heard that many times?
Still true.
A lot of this information is good common sense. You need to teach this to students before they graduate. Having a budget is the first process. Sticking to it is easier for some than others. I do better when I see it on paper.
Great post Jim! A budget is a great tool. Isn't it really more about a mindset or attitude of "hey, I'm happy living simply. I enjoy life better this way." Why do some people take joy in driving their older but PAID FOR car?
Sustainable, green houses and cars are coming into vogue - thank goodness. Will sustanable family finances be far behind?
Thanks for your good ideas and energy!
Bill
Phil - Thanks Phil. There were a lot of lessons to be learned from those that survived the Great Depression. There advices has saved me in the last few downturns and so far in this one. I am conservative investing, but still financially intact in this current market.
Jim Wood Nashville Real Estate (Crye-Leike Realtors, Inc.) It really is so true.
Kay Van Kampen, CDPE, Broker, Springfield Missouri Real Estate (RE/MAX Solutions) Kay, children should not be able to graduate school without learning how to balance a checkbook, and work a budget. I guess the ACLU would consider that 'cruel and unusal punishment!'
Bill Burns - Thanks Bill. I feel we have an obligation to be part of the solution. If we have ideas we should be sharing them. We are seeing too much suffering in this nation that could have been totally avoided if persons looked at the numbers first.
Jim, I like your analogy to the compulsive gambler. Great link for the family budget too!
Rich Cederberg- Albuquerque Real Estate Blog (RE/MAX Elite) Thanks Rich. What many buyers are doing is more risk than a compulsive gambler.
Great advice! Solid budgeting and financial planning could help so many people avoid home buying trouble.
Ilyce Glink (Think Glink Publishing) Thank you Ilyce...maybe homebuyers should all return to some common sense basics. In the last few years finacial prudence and personal savings seems to have totally dissapeared. In our society, easy access to credit has replaced saving for the down payment. Credit is never as good as cash unless you have he financial resouces to back up the amount owed and meet those obligations. The problem many times for a homeowner is when there is a bump in the road of life. A layoff, an illness, or a life event can set the homeowner that has no equity in the home into a tailspin of no return. It is very sad when you consider it is avoidable.
One thing that I would add would be the right amount allocated to a down payment. I recently wrote an offer and the buyer was quite shocked that there was a down payment, something the lender(and I guess me too) in haste forgot to mention...............................chris
Jim and Michael,
While I agree wholeheartedly on the budget, I couldn't disagree with you more on having a bunch of money tied up in equity in the house. An additional $30k down on a $200k house makes about a $250 difference in payment. What do most people do? They put all that down and it normally leaves them with little or no emergency savings.
If they lost their jobs or something happened where they couldn't make their payments how long could they make that $250 lower payment with no money in LIQUID reserves vs. how long could they make that $250 higher payment with $30,000 in liquid funds? Hmm, wouldn't that give them a "better" chance to weather the storm and NOT lose their house thus helping them and the bank?
With no income could they qualify to get any of that "equity" back with a loan from a bank?
Fast forward to where there is a possiblity of foreclosure which situation is the bank more willing to work with? Someone with 20% equity where the bank can foreclose and lose little or no money or someone at 95% LTV where they are much more likely to suffer some or big losses? Don't believe me, who is the government trying to help right now, people with a bunch of equity or those with little or negative equity?
I'm sure someone will talk about what is moral and ethical and I understand that thinking, but when was the last time you heard of a bank calling someone and saying "hey I know you are going thru a tough time is there anything we can do for you?" Yet when they got into trouble they went crying to the government for help. They make the rules I just teach my clients to best protect THEMSELVES according to the bank's rules.
Michael, don't think you can lose your home when it is paid for? Try not paying your taxes and see what happens. We NEVER totally own our homes even when they are paid off.
BTW Dave Ramsey lost his real estate because he had a ton of equity and not enough liquidity, if he would have kept more money liquid he may not have lost his real estate. At least he would have had a fighting chance. Real estate with a lot of equity are actually prioritized to be foreclosed upon during tough times.
Another prime example happened during the Great Depression- Baron Von Hilton (yeah Paris' grandfather) owned a bunch of hotels that were highly leveraged. Well his hotel business really suffered during the Great Depression and when the banks looked at taking his hotels back they realized that there wasn't any equity, they didn't have people lining up to buy the properties and if they foreclosed they would lose a ton of money. So they let him pay what he could until the economy improved where he could better service his debt.
If a homeowner with 30% equity loses their home to foreclosure who's money did they lose? Their's right? If someone with a 100% loan loses their home to foreclosure who's money did they lose? The bank's right? Who's interests do you represent the bank or the client?
As to the argument "it costs you more to have a big mortgage." That could be true, but not necessarily, keep in mind that that $30,000 has the ability to earn a return. Contrary to conventional wisdom they can earn decent returns even in a safe vehicle. Economists call this an "opportunity cost." If I put that additional $30k down I do lower my borrowing costs, but I give up the opportunity to earn a return on that money.
Ask anybody that has run into financial troubles if they would rather have equity in their home or cash in their pocket? See what their answer is.
Committing to repay $300,000, $400,000, $500,000 or more easily makes this the most important financial decision of their lives why don't we have "suitability" standards? Why is there not a Fiduciary for the buyer? Who in the home buying process is looking after the buyer's best interests?
This is so true in a time of a 'shaky economy'. But what we all have to remember is that no economy is guaranteed to stay good, no matter how it looks.
Morning Jim, Well, you have quite a discussion going here ! Don't most of us wish we knew now what we didn't know back then ?
Good solid advice Jim!
Buying that home, especially the first one is always a push. I tell young people that are used to having a lot of disposable income to get used to eating at home and renting videos.
Thanks for this article, Jim, with good information. I especially like your reference to free download of financial plan template at Microsoft.com. http://office.microsoft.com/en-us/templates/TC010233421033.aspx?AxInstalled=1&c=0.
Keep up the good writing.
Thanks for the great article - and loads of comments. I guess I showed what a "woosie" I was as I vascillated back and forth and all over the place agreeing with most comments.... We are pretty much "cash and carry" and have paid off our house, and pay our credit cards totally off every month. If you just use cash, as someone in the beginning said they did, your credit limits on your credit cards will diminish to nothing. Then, when you need it, it's not there. Some of the banks are now wanting to penalize those folks who do not use their cards.......
It's interesting how many facets there are..
congrats on the feature!
Jim
Most people do not want to pay the price of saving (which means to go without a few things). Most want it all today!
Ty
Thanks for the excell download. Saved it to my desktop for myself. Thanks, Take Care
We owe it to our clients to let them know when they are better off renting. It's amazing how many don't live by a budget. Of course when you see the amount of defaulted mortgages maybe it's not so surprising afterall.
Christopher Pataki Bear Delaware Real Estate (RE/MAX Associates) We cannot forget that!
Sorry all, I am traveling this week and cannot answer each comment personally.
A personal financial statement is a very important and often overlooked item.
"Sometimes the worst thing the bank can say is, YES!"
My Dad always told me that you have to know what you can afford, regardless of how much the bank will APPROVE.
Great advice, even I downloaded the Excel Budget!
This is a good one. I like the way you laid everything out and agree with your general premise. I also like the debate and feel you have to look at things on a case by case basis regarding how much a person should put down.
Aaron Silverman (S&S Investments, LLC) I agree totally.
Jenna Dixon, Assoc. Broker (Dixon Realty Advisors (Atlanta, GA)) Your dad gave you very sound advice. That is what my parents told me too!
Lyn Sims ~ Chicago Northwest Suburbs (Schaumburg Illinois ~ RE/MAX Suburban) I think that is a great tool for anyone.
Bev and Bob Meaux - Maplewood, New Jersey area (Towne Realty Group, LLC) I think in the past few years everyone got away from common sense. Worth in the past was more tangible. We had to have assest and good credit. Then we just went to a credit score. That was the downfall. Thriftiness the ability to save, and having a budget was a better measure of worth than a credit score alone.