Look in the Mirror
Location: St. Louis (The Lou)
Job: Middle school Spanish teacher
Family: Single
Annual Income: $35,000
Actual take home pay: $1890/monthly
Current rent payment: $850/month
Savings: $2500
Credit Card Balance: $0
Goal: I want to buy a house. My dad said that I shouldn't be wasting money on rent. Tell me exactly what to do. How much can I afford? What sort of down payment should I have? I have so many questions.
Pete the Planner says: I have a funny story about my middle school Spanish teacher, but I'm guessing you don't care to hear it. Fair enough. Karli, this is one of the hardest choices that we young people deal with on a regular basis. Rent or own. Sooner or later. There are many many factors to consider, so let's start at the beginning.
When two people are in love....okay, I went a little far back. One of the first questions you need to ask yourself is whether or not the concept of "wasting money on rent" is a good enough reason to jump into the real estate market. People generally rent when they aren't (or shouldn't be) in a position to buy. You are only wasting money on rent if you are in a position to buy, and you don't because you don't your due diligence.
Therefore, the primary question becomes "are you in a position to buy?". The answer is no. But that is not a bad thing. We may have just saved your financial life by helping you realize that you can't afford a house right now. Here are the factors that would determine when you are ready to buy a house:
-You would need at least a 10% down payment. If you are looking at a $150,000 house, then you need $15,000. A mortgage person, realtor, or salesperson may indicate that you don't need a 10% down payment. But those are the same professionals that helped us get into the Sub-Prime Lending Meltdown. BTW, don't borrow your down payment. Don't receive the money as a gift either. The point is that if you can't come up with a 10% down payment on your own, then you can't afford it.
-You need to have two months expenses in savings once you close on the house. For you, that would be about $3500.
-Your house payment should be no more than $816 per month. That is 28% of your gross income.
-Are you absolutely certain that you want to live in your next place for at least the next 10 years. It is okay if you don't want to live there for 10 years, but please realize that you may not come out ahead in terms of equity on your home. You would have been better off renting.
Don't be in a hurry to buy a house. Yes, it is a solid investment, but there are some certain qualifications that you should meet prior to diving into home ownership. There will be many people that will encourage you to make the purchase prior to meeting my requirements, but all of them wrong. For real. I'm not messing around. Salespeople are employed for the purpose of selling you stuff. My job is to help you buy stuff when you should.
