Determining what you can Afford when Buying a House

“Ya know, honey, I think we could actually do it,” I said with a big grin over two years ago. I had just completed what I thought was good numbers crunching. I had also just completed a tall beer, a large injection of optimism, and an even larger injection of ignorance. My wife and I had just returned from walking through THE house, which had hit the market (for sale by owner) just hours beforehand, and we were speechless. That was, of course, until I spewed the, “I think we could actually do it” comment. Oh, did I write ‘spew’? Darn fingers; always typing my thoughts honestly. I don’t want to ruin the story, though; I’ll get to the spewing part later.

507 S 57th Street was a quaint 1922 bungalow, with two entry-way columns in front, a Frank Lloyd Write-style entry canopy, a staircase inside about as vertical as the last mountain climbing pitch on Everest, and charm charm charm. But, it was just a little too far away from the school that our (then) 5-year-old was set to attend. We had to live closer, but it never seemed possible, until 454 N 61st Street hit the market.

It happened. We heard about 454 before it hit the market, actually. A friend and close neighbor to 454 said the owners were getting ready to sell. So when it actually happened, we knew we had to check it out. Houses never went up for sale on 61st Street. We looked, we drooled, we smiled, we touched the fancy backplash tile in the gourmet kitchen, we praised the owners, I dragged my wife out of the kitchen, we returned home to 507, and then I did the…h-hm….numbers crunching. Not good.

Here’s the long and short of it, in one concise list. When determining whether or not you can afford a house:

– Don’t forget that bankers and mortgage brokers will almost always show you how you can afford a house – regardless of whether or not you can. They don’t have to live with the mortgage; you do.
– Do the numbers 10 times – factoring ALL expenses, savings, at least $2000 in emergency funds, and even potential upcoming costs.
– Then have a financially-responsible friend or parent do the numbers;
– Consider your current income level, and not some hope-filled dream;
– Try to take the emotional side out of the purchase, as much as possible;
– Don’t forget to estimate how much money it will take to furnish the place;
– Don’t forget to estimate future make-this-house-my-own costs;
– Don’t forget to estimate future, pre-determined maintenance costs;
– Don’t forget to factor in property taxes, association fees, homeowners insurance premiums, yard care costs (if necessary), and so on.
– Remember…buying a house before selling an existing house/condo/studio has the potential to make all the difference in affordability. Existing living spaces don’t always sell for what you think they’re worth.

Don’t do what we did. We bought before we sold; we took out a bridge loan to put down 20% on the new house; we didn’t realize the bridge loan acted as a lien against the house we were trying to sell; we scrambled to pay off the loan and not lose the purchase; we purchased; we moved out of the old and in to the new; we paid two mortgages for six months; we sold the old house for $50,000 less than the original price; we took out another loan; we scrambled some more; we…uh…uh oh…[insert loud spewing sound].

So ground yourself, and stay away from saying things like, “Yeah, I think we can do it.” Don’t think…KNOW!