In a previous post I mentioned that my husband and I are currently renters. In these next two posts I want to provide an overview of the criteria and selection process we plan on taking when buying a home. This first post will detail the guidelines and parameters we have placed on ourselves to ensure that buying a home is a positive experience for us. In the second post I will outline what steps we will take and the considerations that need to be addressed in each step.
We set guidelines to ensure that home ownership is a positive experience that will not drain us financially or put undue stress in our life and marriage. Here are our personal ‘safeguards’ that we would like to have in place before we buy:
- 20% down payment. A 20% down payment seems very daunting when I think about it. However, a larger down payment will ensure smaller monthly mortgage payments for many years to come, freeing up cash for us to travel, invest and spend on discretionary items as we please without incurring unnecessary debt. Having a decent down payment will help us have a good quality of life and reduce the chances of being house poor.
- 44% total debt service ratio (TDSR) or less (including mortgage payments). My experience with debt has taught me that carrying debt or having credit available can be beneficial if used wisely or a nightmare if mismanaged. Like anything else, too much of a good thing can be harmful. A 44% TDSR or less at the time we buy a home will ensure that our debt is manageable based on our income and we have money left over to take care of other needs and wants in our budget.
- 25 year amortization period. Paying off a mortgage quickly is not something we are rushing for. However, carrying a mortgage well in our 60’s or 70’s is also not a desirable alternative for us. At 31 years old, a 25 year amortization will allow us to retire mortgage free before the age of 65. Even if we bought a home 5 or 10 years from now we would still be able to meet this target goal of being mortgage free at 65.
- 10%-15% savings rate. We currently save and invest 30%-43% of our income. This savings rate will not be sustainable as our family and responsibilities grow. However I would like to maintain a savings rate of 10%-15% of our annual income. All long term savings are invested which means through stock appreciation and dividend payouts, our net worth is growing. I want to continue a healthy savings habit as homeowners.
- Maintain a healthy level of giving. Giving tithes and offerings have been an integral part of my faith and something I hope to maintain.
- Managing needs expenses on one income. This guideline has more to do with the future than the present. When buying a home, I want to make sure we can cover our household needs on one income (most likely my husband’s income). This will give us the flexibility to decide when I would like to return to work once we have kids and whether it will be full time or part time. With my parents living overseas and no immediate family in Alberta, day care costs or staying home longer will more than likely be a reality for us and I want to be prepared for that. Any income I would make would go towards retirement or discretionary spending. We currently cover all our needs on one income and use the other to save/invest or spend on our wants. Being able to cover all or most of your financial needs (not wants) on one income will also help us to better adjust to a situation where one of us may be laid off. We currently have an emergency fund in place but within 4-6 months this amount would be depleted.
Why did we choose to create guidelines and boundaries around buying a home? The above 6 guidelines are my personal ‘safety’ measures to ensure that home ownership is a great experience for us. Here are other reasons:
- Buying a home can be a very emotional experience. By having objective guidelines and parameters that can be verified by numbers, it helps separate the emotions from reality. Even though I am sure emotions will still play a part, seeing the numbers will help put things back to perspective.
- These guidelines are not only a reflection of income and expenses, but our values, beliefs and future goals. By creating these guidelines I can stay true to myself without feeling like I am compromising what I want out of life.
- Financial problems and lack of communication are a major cause of divorce. Although my husband and I have been together for 9 years (since college) and married for almost 3 of those years we are not immune to money problems. I want to put us in a situation where we can minimize money fights as much as possible.
- Having hard numbers before going for a mortgage pre-approval helps me to feel in control of the situation. Crunching some numbers ahead of time will provide me with the ability to say yes or no confidently during the buying process, knowing my best interests will be included in the process.
For current and soon to be home owners, are there any parameters you had placed on yourself and your family when buying a home? Did you find them helpful or limiting? Would you do things differently if you could?
Tags: a lot of debt, Budgeting, budgeting for a home, down payment, home ownership, how to budget to housing costs, mortgage payments, savings rate, student debt, student loans, total debt service ratio