My #1 hack for figuring it out!
Home ownership is a dream for many people but dreaming isn’t enough when you’re trying to figure out if you can afford to buy a home or trying to pinpoint just how much house you can afford. The internet is littered with guidelines and rules of thumb such as what percentage of your pay check you should spend on housing or that you shouldn’t buy a house more than X-times your annual salary. These guidelines are based on averages but averages don’t account for, well, you and your specific situation. There are so many factors and considerations! Are you single or married with 2 kids, are you wanting to buy in a high cost-of-living area or a less expensive housing market? In this article, I want to share my #1 hack for figuring out how much house you can afford based on you, your income, your budget and your comfort level!
My First Time…
I bought my first property in 2004 in South Africa. I had just gotten my first “real” job after finishing university which involved moving to a big city across the country. I found an apartment to rent in a brand new apartment building and after a few months, I saw a sign posted that the property developers were now selling off the apartments and existing tenants would get a special deal. I arranged to view some of the available apartments and two days later I put in an offer on a 2-bedroom unit. That was also when I first spoke to a mortgage consultant to see if I could even qualify for a mortgage. Two months later I was the proud owner of an apartment that I could barely afford. Disclaimer: This was prior to the 2008 mortgage crisis and the bank had been more than happy to give 100% financing to a fresh graduate with a stable job. Positives: I had a good starting interest rate and I had no other debts. Negatives: I was upside down on the mortgage right from the start because of including closing costs in the mortgage, the interest rate was variable with the repayment amount changing every 3 months and I was living pay check to pay check because my mortgage payment was so high. Did I mention that my 15 year old car was in the repair shop more often than it was on the road and I had no emergency fund to fall back on? With all the mistakes I made on this home purchase, it was pure luck that it didn’t turn out worse than it did…. But that will be a separate article!
The Second Time Around…
Fast forward to 2010 and I was living in New York City, USA. I was planning to stay long term in the USA and wanted to pay a mortgage rather than spend money on rent every month. This time I had a down payment saved up and I was also much better educated about personal finance, credit and managing my money. I went to my bank to get pre-qualified for a mortgage. For a pre-qualification, the bank assesses your self-reported income and expenses and calculates an estimated mortgage amount that you could qualify for. The mortgage consultant tapped away on his calculator for a bit and confidently announced an amount that was much higher than I had expected. I asked what the monthly repayments would be on a mortgage of that amount and it was a lot more than I was currently paying in rent. I was not so confident… In addition to the monthly mortgage payment and estimated condominium or HOA fees, I would also need to be prepared for ongoing maintenance and general expenses associated with property ownership.
The Hack Revealed
After ruminating on this for a few days I decided to conduct an experiment — I would live as if I was paying off that mortgage for 6 months to see if I could really afford it. I revised my monthly budget to include my current rent payment as well as the difference between my rent and the estimated future mortgage payment. I also set aside an amount in my budget for HOA/condominium fees and a maintenance budget for anything I might need for my fictitious property. Starting the next month, I paid my rent and transferred the rest of the house money into my savings account and started getting used to living off what was left. To make the experiment even more real, I got in touch with a realtor to show me properties in the price range of the hypothetical mortgage amount. I picked one of the apartments I viewed as “my” apartment and stuck the listing photos up on my fridge to have something real I could imagine owning one day.
Why is this hack so awesome?
The first reason this hack is so awesome — I was able to figure out how much house I could really afford. While the mortgage consultant had prequalified me for a mortgage based on a % of my income that was average for a single person with no kids, it was important to see if that mortgage would fit with my lifestyle and priorities. In my case, I figured out that I could, at a stretch, afford a property in that price range but that it would be uncomfortable. If anything unexpected happened, for example a major appliance needed to be replaced, I would be hard pressed to not haul out my credit card and have to pay it off over several months. Also, I ended up having to delay some other purchases during those 6 months because my budget was so tight. Using this experience, I was able to determine a more realistic price range for what I was prepared to spend.
The second reason this hack is so awesome — I saved up another chunk of change towards my dream home. During the 6 months of my experiment, I was putting additional money aside and this was a great help when I finally got to purchase a property some months later! When I moved in, I needed a new air conditioner and in the first year I had to replace the windows.
The third reason this hack is so awesome — it built my confidence. Deciding to buy a property is a BIG decision and it may be the first and only time you’ll make that decision in your life. Since I had made so many mistakes the first time around, I was determined to do better and to be sure I was making a sound financial decision. Sometimes you have to live like you can do something in order to prove to yourself that you can. Taking 6 months to pretend you own a property and paying the mortgage, and doing so successfully can help you be more confident when it comes to actually doing it.
The fourth reason this hack is so awesome — It doesn’t just work for buying a property. This same hack can be used for any large purchase. Do you want to buy a new car? Do you want to move to a larger apartment? Do you want to stay at home to look after the kids and live off only one income?
In Conclusion
Would you consider using this hack in preparation for your upcoming home purchase? How could you use this hack to plan for another major life event or purchase?
