Don't Make This Big Home-Buying Mistake

Owning a home has long been a part of the American dream, but unfortunately, it’s now harder to achieve than it used to be. According to research from the Joint Center for Housing Studies of Harvard University, in 2022, the median price of a single-family home was 5.6 times higher than the median American income. This is a higher figure than at any point recorded, going back more than 50 years to the early 1970s.

In addition to higher home prices, people trying to buy right now are also contending with mortgage rates around 7% — when just three years ago, we could’ve bought with a mortgage rate of 3%. In short, it’s become a lot more expensive to buy a house.

If you’re tired of renting and are dreaming of buying a little slice of paradise to call your own, you might be willing to stretch financially to make it a reality — but that would be a mistake. Here’s why you shouldn’t commit too much income to housing costs, as well as an easy way to tell whether you can afford to buy a house.

The 30% figure

It’s a pretty common recommendation to limit your housing costs (including your mortgage, property taxes, homeowners insurance, and any other regular monthly housing expenses) to 30% or less of your income. This is a reasonable figure that should, ideally, leave you with enough money left over to cover your other bills and financial obligations, like saving for retirement and paying off other debt.

If you commit to spending too much of your income on housing (also known as being house poor), it could really hurt you. You might struggle to make the payments, for starters. But you might also be less able to put money away for emergencies or future goals, like retirement or helping your kids with college costs. You could find yourself resenting the home you worked so hard to buy — and you don’t want to be in that situation.

Practice living with your new housing costs

There’s one way to find out ahead of time if your new budget will work: You can pretend you’re already paying more for housing, but instead of sending the money to a mortgage lender, put it into a savings account.

More: Check out our picks for the best mortgage lenders

For all the time I’ve spent saving to buy a home (more than 18 months now), this is what I’ve been doing. I set a savings target for myself at the start, and I’ve been putting away money toward a home purchase just about every week — while still paying my regular bills. Thanks to this, I’m confident I’ll be able to swing my new costs once I actually start paying them.

You certainly don’t have to engage in this exercise for as long as I did, but it’s a good idea to try it out. Do some math, look at home prices in your area, investigate current mortgage rates, and try to create an estimate of what your costs might be. (A mortgage calculator is a great tool for this.)

If you think your housing costs will go from $1,200 per month to $1,900 per month, try putting the extra $700 into a savings account for six months. If you feel comfortable parting with the extra money and don’t run into trouble covering your bills, you can seek out mortgage pre-approvals with more confidence.

And hey, you’ll end up with $4,200 extra in savings that you can apply to a home purchase — or the emergency fund that will be even more crucial once you have a house to take care of (especially if it’s an older one).

Don’t compromise your other goals when you buy a home

While you should certainly expect your life to change when you become a homeowner, ideally, doing so shouldn’t come at the cost of other goals you might have. Yes, I’m buying a house this year, but I also intend to open my first-ever retirement account and contribute a set amount of money to it every month. I’ve also enjoyed having the money and flexibility to travel more since I became a full-time freelancer, and it’s not something I want to give up. So I’m glad I’m not committing to spend more than 30% of my income on a house.

Before you start seriously considering buying a home, think about your own wants, needs, and goals. If taking on a mortgage will mean no longer having the money to satisfy them, it’s better to learn that before you find yourself stuck in a home you can’t comfortably afford.

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