Should you believe a commissioned real estate agent or mortgage broker when they tell you how much house you can afford?
That is, not unless you're on a mission to increase their financial happiness at the expense of yours.
No matter what they tell you, the goal of every real estate agent and mortgage broker is to get you to buy the home that pays them the highest return for their efforts.
And unless these vested sellers happen to be your loving parents or close personal friends, they really could care less if ten years from now you are forced to sell your home at a loss because you couldn't afford to keep up with the mortgage payments and all of the hidden costs of ownership they failed to warn you about.
No matter what your income level, if your annual non-home related expenses meet or exceed your take-home pay, then you can't afford to purchase and maintain a home.
The only number that matters when determining how much house you can afford is the difference between how much you take home and how much you spend on non-home related expenses.
If you don't know how much that difference is, be sure to visit the personal budgeting calculator to get a realistic affordability number to work with.
Beware of Hidden Costs of Home Ownership
Contrary to what some real estate agents and mortgage brokers will attempt to get you to believe, just because you can afford to make the prescribed monthly principal and interest mortgage payment does not necessarily mean you can afford to purchase and own the house in question.
That's because there are many other costs that come with owning a house that are above and beyond the monthly payment. These include:
- Private Mortgage Insurance (PMI)
- Property taxes
- Homeowner insurance
- Maintenance costs
Did Your Real Estate Agent Tell You This?
According to an American Housing Survey (AHS) conducted by the Census Bureau in 2003, the average annual cost to maintain and operate a house at that time was $5,464, with 38% of that amount going for taxes, 40% for utilities, 12% for insurance, and 10% for maintenance.
Using the CPI Calculator to adjust for inflation between 2003 and 2018, that $5,464 has likely grown to $7,470. And if you divide that by 12 months ...
I believe the reported maintenance figures are actually lower than they should be based on hearing numerous real estate agents report that most homeowners are failing to properly maintain their homes.
Ignored Ownership Costs Lead to Falling Home Values
In my opinion, homeowners failing to properly maintain their homes is a result of purchasing more house than they could afford.
After all, if you buy more house than you can afford, then all of your available funds will be going toward meeting the minimum obligations to keep your house -- leaving little if any funds for home maintenance and repairs.
Of course, if you can't afford to properly maintain the house you are buying, then your house may actually fall in value (depreciate) over time.
Or, even if you are properly maintaining your house, but your neighbors are not, then your house's value might fall in spite of your best efforts -- because now it sits in a run-down neighborhood with falling property values.
Ignorance Is Bliss ... For a While
The bottom line is this.
If you buy a home-based on what self-serving sellers say you can afford -- without carefully factoring in the homeownership costs -- then sure, you may be able to afford to make the payments for a few years.
However, as the mechanical and material parts of your home begin to wear out and need replacement, you will likely come to regret taking the sellers at their word.
Due to the ignorance of homeownership costs and wrongfully assuming that their income levels would last forever, turns out that many homebuyers couldn't afford their homes even if someone had given it to them for free.
Of course, no one can predict what will happen with your future income.
So what can you do to protect your home from economic downturns besides adding another insurance premium to your budget?
The best way I know of to protect your home from the next time the greedy financial giants decide to fatten themselves up by eating their own children, is to adopt the Grow Slow, Pay As You Go Method of Home Buying.