I would like to talk about home ownership, in particular, mortgages. Now everyone tells you that home ownership is better than renting. Some people would say renting is better than home ownership. I don’t really care what you do-I just want you to do what’s best for you and your finances.
Two Important Tips
The first thing I would like to tell you is that when you apply for mortgage, you most likely will get pre-approved. Now pre-approval occurs at the gross income level. You will see ratios like a front end ratio of 36%, and maybe a back end ratio of 40%.
I say forget all that; what you should really focus on is net income. That’s what you live on! You live on your net income. You don’t live on your gross income. Look at your pay check. Do you see where the taxes are taken out? Then you see what is actually being put into your bank account? That’s your net income.
Tip #1
I say limit your mortgage to no more than 25 to 30% of your net income. You can go higher, and you can go lower depending on other things that you must pay during the month. So, your “must haves” should be no more than 50%.
That’s 50% of your net income, whether you are a single person, whether you are a married, that’s it. Your mortgage should be 25% of your must haves at the maximum, that’s what I believe.
Tip #2
The second thing that you should do, and many people don’t tell you to do this is to practice paying your mortgage.
It makes sense to me. That’s what we did! If your rent is 900 dollars and you know your mortgage is going to be 1500 dollars or whatever number that you decided it’s going to be, you should start practice paying that. After 3 months to 6 months you can see if you are really enjoying your life.
Do you like your life with the 1500 dollar mortgage payment? If you are still happy, you should consider purchasing a home. However, if you are unhappy or your budget is really tight, you might want to hold off, save more money, or look for a less expensive home. That’s just my two quick tips.
One last word…
One last thing. I always get this question. When is the best time to buy? The best time to buy is when you are ready. I don’t care if the market is hot, and I don’t care if the market is cold. If you are not ready to purchase, if you are not ready to stay in that mortgage for the term length or at least 7 years. You are not ready. Get out of this mentality that it’s a buyer’s market or it’s is the seller’s market.
The time to get a mortgage and the time to take on the serious obligation is when you are 100% ready. You did your research and you feel comfortable with making that decision, that long term decision. Think about this the average length of home ownership is seven years. So, if you can’t see yourself sitting still for seven years, it isn’t the right time to buy.
Do you agree with me? Have you sold a home in less than seven years? Did you practice paying your mortgage before buying your home?
Dominique Brown
Dominique Brown is the CEO of DNB Financial Planning, landlord, financial educator and non-profit owner. He enjoys working out, helping others and everything finance. His sole purpose for creating this website is to share his passion of personal finance and to help you simplify your finances. I love questions.. So feel free to ask me anything!
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When you say 25% of net income, do you include insurance and taxes? Taxes in my town are very expensive.
Yes, but if you do go higher than 25% you have to limit the other things… your call though
Good tips. I've always went by the standard that the home payment should be 33%, but 25% is even better.
I use 25% of net income.. Are you using 33% of net or gross income?
Interesting. I'm currently doing #2 while we're waiting to close on our first house. I'm calling it "pretend mortgage & bills payments." Also, I'm putting it straight into savings. Great tips. :-)
-Jen
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Jen,I'm glad you are ahead of the game. How do you like your life with the new mortgage payments? On Tue, Aug 21, 2012 at 8:33 PM, YFS <yourfinancessimplified@gmail.com> wrote: approve
Good article man, I have never heard of the pre-planned mortgage test on your finances that is a cool idea.
Haha… I told you it\’s a home buying tip you never heard of :-). This literally saved my family financially during the home buying boom. It\’s the main reason why we didn\’t jump right into the housing market when everyone bought one.
Whenever I've told people to practice paying their mortgage they treat it like it's the most novel advice they've ever heard. Why go into a mortgage cold if you aren't sure how it'll really change your lifestyle? Great tip.
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