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Are you Ready to be a Homeowner?

Most of us would probably buy at least one house during our lifetime. For some, buying a home is a dream; for some, it is a definition of their success in society; for some, it is simply a shelter where they don’t have to pay rent.

No matter the justification, when a person starts to think about buying a home, it is prudent to conduct a self-evaluation to see if they are financially ready to get their feet wet in home ownership. This post looks at some of the key aspects that may be worth considering before taking the leap.

Consumer debt

If a person is riding the debt wave well by having outstanding credit card bills at the end of the month, then the time to buy a home may not have arrived yet. Simply being able to make the minimum payments on credit cards or paying all balances in full at the end of the month with no money left over does not mean that finances are close to being in order. Contemplating to buy a home involves more groundwork than simply replacing the rent payment with a mortgage payment. If credit is funding regular fixed expenses (groceries, Internet, phone, etc.), then all is not well.

Absence of an Emergency Fund

Whether the emergency fund lasts for 6 months or more depends on the individual’s situation and comfort level but the lack of a substantial emergency fund is a big red flag for a future homeowner.

Such a fund is critical to cover unexpected maintenance work in the new home, job loss, illness, etc. The essence of keeping financial reserves is to avoid missing mortgage payments, at least for a few months, due to certain incidents and/or accidents. In the event of other mishaps like a broken appliance, inability to purchase a replacement could lead to hassle and discord among family members.

Stability of Income

People who have not held a job for a while (say, at least a year) are better off refraining from house-shopping. Conventionally, once a young adult gets a good job after college, s/he is ready to buy a house soon after, especially if there is no other debt.

Even if the person graduated without any student loans, their spending habits determine the readiness. Living paycheck-to-paycheck despite the absence of any loan payments means that there are certain basic finance lessons such as “spend less than you learn” (or “earn more than you spend”) that need to be imbibed before thinking about buying a home. Evidently, not buying too much home is critical.

Credit History

Knowing the credit score is a primary step before approaching lenders, as maintaining a good score is essential to obtain a low interest rate on a mortgage or any other loan. Keeping debt levels low, while not missing monthly payments on the amounts owed will go a long way toward maintaining, if not improving, a good credit report.

Home Ownership Costs

Some tenants have a single payment in the form of rent, while others may pay a separate amount for utilities. But, a home owner may have to include property taxes, maintenance expenses, utility bills, insurance payments, and probably Home Owners’ Association (HOA) fees in their budget to evaluate their readiness.

Time

Evidently having the skills, interest, and time to fix problems in a new home will save money that could have been shelled out to repair companies. Being handy by nature would help but having the time and willingness to learn are big money-savers.

Can you think of other aspects that one would have to evaluate before committing to buy a home? Did you repent for not thinking it through before buying a home? Any stories that could be shared?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism.  You can read his other articles here.







18 Comments, Comment or Ping

  1. 1. Steve

    Should (or do) mortgage brokers as a licensed profession have a fiduciary duty to their clients?

    Mortgage brokers in Canada are actively engaging in arranging zero-down mortgages where the downpayment is borrowed to skirt the 2008 5% min rules.

    I have a family member who tried to buy a house 2 weeks ago. The agent and the broker they recommend convinced them to buy a $425,000 house on the basis they did not need a downpayment, they only needed $7500 cash in the account for a short time to get the mortgage. They borrowed the money from another familiy member.

    Then, they were informed they actually needed about $21,000, and encouraged them to borrow more money from family. When the family could not cough up another $13,000, they were advised to get a family member to write a cheque, then stop payment on it. By the time the cheque had failed to clear they would already have the mortgage signed.

    Luckily, no one was stupid enough to commit fraud so they could get a mortgage. And, I don’t see how a lender would ever accept an non-guarenteed cheque for downpayment. So, the purchase fell through anyway.

    Is it possible for me to have any less respect for real estate agents and mortgage brokers? Licensing in these cases does little to protect the public, on the contrary it gives the public a false sense of security that these people are under a fiduciary duty. Clearly not.

  2. 2. SST

    Without getting too far off track, I would say there is a minute degree of “fiduciary duty” in most modern market places.

    As for a house or not?

    Really shouldn’t have to go much beyond checking the rent:mortgage ratio in your area.

    If you are able to rent a similar residence for less than the cost of a mortgage (and ALL other expenses), then renting would be the most intelligent course. Fiduciary duty to yourself!

    Don’t fall victim to the North American stigma of renting vs. “ownership” (which is merely renting from the government), especially in certain bubble-area cities.

    In my specific case, over the long-term (30 years), renting and owning are close, but owning still comes out ahead — even after reno’s etc.

    The worst/funniest scenario I was witness to was a couple who bought a house in the 80′s and locked into some ridiculous 25-year 18% mortgage rate. The year after they paid off their house (which had become very shabby due to lack of funds for upkeep), the city bought it and within a few days had bulldozed it to make a park!

  3. Great post, Clark. Would you suggest saving enough to be able to put at least 20% down? I’ve taken care of all student debt, built an emergency fund, and now I’m stockpiling my RRSPs for a downpayment. I’d love to avoid using CMHC insurance, if possible. It’s hard considering Toronto’s housing market these days!

  4. Great article I really enjoyed reading it. Owning your own home is always first prize but the expenses and hidden costs normally catch you out. Home insurance and an emergency fund will offer some peace of mind. I will be honest though before I became a homeowner I had much more free money every month :)

  5. Great article. I think that the last point is key. Having homeowner skills can be the difference in being successful in being a homeowner.

  6. 6. Deacon

    I think you hit on two main points: pay off your consumer debt first and have an emergency fund. I think those two are crucial to do before you decide to buy a house. Well said.

  7. 7. Bob

    Uhhh, did your first line mean to say that most of us would LIKE to buy at least one house? Because it is totally incorrect to say that most people do buy at least one house . . . most people do not.

    I know this has been covered before, but I think the idea of Emergency Funds is highly overrated if by Emergency Fund you mean a separate pot of money from your RRSP. The Wealthy Barber agrees with me. Why keep 6 months worth of low-interest cash, when you can put it into higher yielding vehicles AND get the tax break. If you really do run into a legitimate emergency (i.e., you lose your job for 6 months), then your lack of income during that time means your RRSP withdrawals will almost certainly be at a lower tax rate than when you contributed, which means you save yet more money.

    As for unexpected home maintenance work . . . I can think of none of those that would come even close to needing anything like 6 months of income. What is the most expensive critical appliance that can go? A Furnace? Which costs, what, $2500? For this and all other types of “not actually emergency” expenses, a line of credit is likely to work better and be less expensive in the long run than the lost opportunity costs of keeping 6+ months of cash lying in low yield “liquid” accounts.

    Also: thinking about a home in *only* financial terms is, I believe, a mistake. We can all agree, I think, that prospective homeowners should be financially ready, but contrary to SST’s comment above, there are other non-financial reasons that make home ownership attractive, even if it costs more money than renting. Stability. Sense of Community. Pride of Ownership. Ability to tailor the property to your exact needs and wants. Etc.

  8. 8. SST

    @Bob: “…there are other non-financial reasons that make home ownership attractive, even if it costs more money than renting. Stability. Sense of Community. Pride of Ownership. Ability to tailor the property to your exact needs and wants. Etc.”

    All those are completely dependent on the individual(s).

    How is renting any different than buying in regards to establishing a “community”? Isn’t the average house inhabited for ~7 years before moving to a different community? There is ALWAYS fluctuation in community, be it renters or owners.

    Stability isn’t really a factor either. Remember, the landlord wants to make money just as much as you want a place to live. Erratic landlords usually find themselves with a high vacancy rate.

    “Ownership” has been greatly and overtly pushed on the post-WWII North America public. Remember Bush’s slogan? Renting has a very negative stigma in this society, even though renters probably make out better than most owners (no stats). Ever hear of a renter being “underwater”?

    And pride? At what cost? I know a couple in the states who make loads of money, they have rented the same house for close to ten years. They save both money and time for things which are more important and/or enjoyable to them than pride.

    Perhaps I am mistaken, but a lot of home buyers think they have to or should buy, but they don’t ask themselves “WHY do I want to BUY a house?”

    I guess if a person really wanted a swimming pool or bright orange tiger stripe walls (a true story) they should consider buying. But again, most house owners are middle-of-the-road and don’t alter the land/house to any great degree from when they purchased.

    In my specific instance, I wanted the most land I could afford. The structure had to be sound and functional, but it wasn’t the most important thing. I bought a very large lot (complete with a house!), un/fortunately in a foreclosure deal. I have turned half the property into a food garden and am in the process of turning another 1/4 of the lot into more garden — urban farmer! The other 1/4 is slated for backyard space and a deck, as well as a future garage+rental suite (I said it was a BIG lot!). I had a definite plan going in, I didn’t buy just to buy.

    Each to their own (ha ha). :)

  9. 9. Clark

    @Stephen (Saving from Scratch): I would go for at least 20% down.

  10. 10. bob

    I guess if a person really wanted a swimming pool or bright orange tiger stripe walls (a true story) they should consider buying.

    Or if they wanted to turn half the property into a food garden, another 1/4 into more garden, and another 1/4 into backyard space and a deck, as well as a future garage+rental suite . . .

  11. 11. SST

    Hi bob — you forgot to quote the other part of my post in response to the ‘ability to tailor the property to your exact needs and wants’ argument:

    most house owners are middle-of-the-road and don’t alter the land/house to any great degree from when they purchased.

    Thanks.

  12. 12. Bob

    I guess I’m not willing to be the judge in deciding how much ‘personalization’ a house requires before it is ‘worth it’ to buy instead of rent. I’ll leave that up to the owners to decide for themselves.

    The fact is (as in your own case) there are many good non-financial reasons for owning a house.

    I fully recognize that financials need to be sound, etc., but I really dislike anti-home buying arguments that do not, at the very least, acknowledge that such reasons exist.

    And, frankly, if you expect to convince people not to buy a house based solely on whether it costs more to buy or rent without mentioning the non-financial reasons people actually feel the need to buy houses, then you are not going to be very successful.

    It is disingenuous to make the claim (or even to imply) that houses are only financial instruments.

  13. I’d like to add that renters also need to have insurance for personal belongings. It’s a quarter of the full insurance cost in general – many don’t have it and it’s a mistake.

    Otherwise, as you mention, it’s important to include the cost of property tax and the utility bill. I am not sure what the maintenance cost really add up to though … Are you saving for a roof? What if it’s a condo? It’s not like I have regular maintenance annually on my home that I have to account for. Big ticket items just need to be planned out over time. Maintenance is very limited if you buy something new, maintenance is delayed for a number of years.

    The key is to buy something you can easily afford and not try to keep up with the jonesses. If you aren’t stretched, the emergency budget for fixing or replacing appliance should not be needed I would say. I have never had an emergency fund, I prefer to have my money work for me like other comments. My job doesn’t require me to have an emergency fund.

  14. I think just being able to deal with the stress is hugely important! When you rent, you have a peace of mind knowing that any big problems won’t be yours to take care of. If you own a house, and your roof leaks, your basement floods or your house catches fire… the entire burden falls on your shoulders. Sometimes it’s tough to stomach!

  15. I think the real estate train may have passed.

    I am in Clermont Florida seeing Walt Disney World etc.

    Renting a home with 4 bedrooms 3 bathrooms and a pool for $130/night all in.

    Houses here are selling for $120,000 US. In 2005 they were selling for $400,000. Prices in the Orlando area are still going down.

    Cheers,

    Brian

  16. Brian,

    That sounds incredible. I have heard horror stories of people trying to sell their homes in Florida and the extra taxes you need to pay as a foreigner.

    It is one of the biggest financial decisions of someone’s life and I hate hearing so many people’s tales of brokers or advisors advising these 0% down or very little cash mortgages.

  17. Hi Steve,

    I don’t know where you are from but the debt per person in Florida is about $17,000 per person. In Ontario is it only $20,000 plus. So the information from Harper is we are doing much better in Canada.

    Florida’s state debt is about 140 billion with a population of 19 million
    Ontario (much better) is $260 billion with a population of 13 million.

    So housing prices is better in Canada (Ont, BC) because we have better banks and the current government never allowed 0% down or 40 year mortgages, etc.

    Cheers,

    Brian

  18. 18. SST

    I work with a woman whose Prairie parents bought a winter vacation house in Arizona, post-2008…for $20,000. Just saying.

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