The Carr Report: Get your financial house in order first, then seek homeownership!

by Damon Carr, For New Pittsburgh Courier

We all need a place to stay. There’s no place like home! Purchasing a home is the single largest financial transaction most people will ever make. It’s often the largest household expense. It’s better to own your home than it is to be a forever renter. If you don’t do your homework before becoming a homeowner, homeownership can be the single largest financial mistake you ever make.

I launched a mortgage company back in 1999. During this time, I partnered with a nonprofit company to provide training to prospective first-time homebuyers. The training was called “Get Mortgage Ready.” I offered general information and customized advice helping people qualify for a mortgage. The premise was “Get your financial house in order first, then seek homeownership.” I also helped countless people obtain mortgage financing. In 2008, when the mortgage market collapsed, I went back to corporate America. I helped people who had fallen behind on their mortgages and couldn’t catch up. I structured loan modifications —making the mortgage both current and more affordable. This prevented the homeowner from going into foreclosure. I eventually became manager of a team called “Driving Population.” The short of it is, we worked with attorneys across all 50 states, initiating and completing required steps for foreclosure.

I had a front row seat from an expert point of view to observe: The joy of becoming a homeowner; the fear of falling behind on the mortgage and not knowing what to do; the terror, shame, and embarrassment of losing your home to foreclosure and having to start all over.

Make no mistake about it—homeownership is a wonderful thing. Through principal reduction and home value appreciation, you have the potential to build equity. If you want to increase your net worth and become wealthy, building equity is key. You’re connected to a community and you feel a sense of stability. There are tax incentives. You have the ability to make up to a $500,000 profit on the sale of a personal residence TAX-FREE. During the “hopefully short time” you have a mortgage the interest and property taxes you pay may be tax deductible. The improvements you make to your home will provide comfort to you and your family while at the same time increase the value of your home.

You’ve probably heard about all of the positive things associated with homeownership. Those who ultimately benefit from you purchasing a home tend to exaggerate the benefits of homeownership and never mention the fact that there is risk and many miscellaneous expenses associated with homeownership. When you consider only the upside potential without factoring in the downside risk and expenses, you have a skewed vision of the true cost of homeownership. So often we’re led to believe that you can get a house for what you pay in rent. The truth is you’re not comparing apples to apples when you’re comparing mortgage payments and rent payments. There are other expenses that you have to factor in as a homeowner such as taxes, homeowner insurance, private mortgage insurance, maintenance, and repairs that are not applicable when you’re paying rent. In addition most people end up paying a couple hundred dollars to thousands dollars more per month on a mortgage payment than they paid in rent payments. This is because during the home-shopping process they learned the type of house they wanted to purchase exceeded what they paid in rent.

Here’s some risk and expenses associated with homeownership:
• The neighborhood you live in could become undesirable for a number of reasons and your home decreases in value
• Long-term debt repayment schedules (30-year mortgage) compromises equity build-up in your home due to the fact that 85-96 percent of mortgage payments goes toward interest in the first 15-20 years
• You’re responsible for the upkeep and repairs of the house
• You’re responsible for all utility bills

Homeownership is billed as the American Dream. It’s not. It’s a component of the American Dream. The American Dream includes raising and providing for your family, having reliable transportation, vacationing, keeping your children active in various activities, and having a life. It includes being prepared to withstand the uncertainties of life without jeopardizing the family’s well-being. Lastly, it includes saving for college and retirement.

When you consider only the upside potential of homeownership and not the downside risk and all related expenses, you have a false sense of homeownership. When you make homeownership the American Dream and not a component of the American Dream, you tend to neglect other components that make up the American Dream.

This leads to the most common mistakes people make when they buy a home:
• Buying too soon • Taking on more housing expenses than you could reasonably afford
• Trusting that if the bank approved you for the loan it must be OK
• Agreeing to take on mortgage loans, terms and conditions you don’t fully understand
• Becoming house poor

Mortgage lenders qualify potential borrowers based on their gross income (before taxes). The problem with that is, you don’t get a chance to spend your whole paycheck. Uncle Sam will get his. The standard ratios used to qualify you on a common mortgage loan is 28 percent (Front end ratio) and 36 percent (Back end ratio) respectively. Some programs have higher debt-to-income ratio limits. This is akin to you being eligible for a mortgage with 45 to 60 percent of your net income (after taxes) tied up in debt payments.

Is it starting to make sense why it was easier to save for your down payment on your home than it was to save for your future goals after you purchased your home?

Becoming a homeowner is the goal but renting has its place. One should rent while getting their financial house in order. Having your financial house in order is having your debts under control—preferably paid off, having money saved for emergencies in addition to having at least 10 percent to put down on a home, and having a retirement and college savings plan already established. This will reduce the likelihood of your financial house caving in and will allow you to enjoy every component of the American Dream.

When purchasing a home, some rules to live by:
• Do not take on a mortgage payment that exceeds 30 percent of your net income
• Do not purchase a home more than 3 times your annual income
• Never do an adjustable rate mortgage of any kind
• Do not do a 30-year mortgage. Opt for a 15-year or 20-year mortgage instead.

(Damon Carr, Money Coach, can be reached @ 412-216-1013 or visit his website @ www.damonmoneycoach.com)

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