Home Sweet Home

We live in a very transient society. Unlike the turtle, whose shelter is
always attached to his body, we are required to locate a new shelter each
time we move. The financial and logistical issues that surround the search,
transfer and establishment of what we call our “home”, can be frightening
and sometimes overwhelming. Having moved twelve times in my twenty-five
years of marriage, I have gained an almost envious appreciation for the
simple and uncluttered package deal that God provided for the turtle. It is
no surprise that the common box turtle is able to enjoy a lifespan of up to
100 years.
I think it is important that we take a minute to differentiate between
“house” and “home”. In a way, we are much like the turtle. We do actually
take our “home” with us at all times. The old saying, “Your home is where
your heart is” has become more meaningful to me over the years as I have
seen the numbered moving stickers become layered on the bottoms of the
furniture throughout our house. The once endeared attachment to the bricks,
plaster and wood that is more accurately described as our “house” has been
replaced with a more realistic perception of a house as a mere tool.
Regardless of the semantics, there are some very important practical issues
that we need to address concerning the “house” that will help keep the
“sweet” in “Home Sweet Home”. There are basically two categories of people,
those that are looking to buy a house and those that are already in a house.
There are specific financial concerns for those that are looking to buy a
house that might differ from the concerns of those that are already in a
house. How much house can I afford? How much should I put down as a down
payment? What type of mortgage should I get and for how long? Do I need an
established credit rating to get a mortgage loan? These are some of the
common questions that house buyers must answer. (The answers to these and
more can be found on my website, www.coeinc.org).
I remember the first house my wife and I bought. After having completed the
walk through with the realtor, we said our goodbyes and returned to our car
parked in the front of the house. We sat there quietly for a few minutes
admiring the details of the house and reflecting on the walkthrough we had
just completed. Knowing that we both had emotionally and mentally signed
the deed, my wife asked, “Can we afford it?”
I remember thinking at the time, that I had no clue whether we could afford
it or not and in a way felt it was not even up to me to decide. In my
ignorance I turned to my wife and said, “If the bank will lend us the
My warning to you is to never let someone else decide your financial
destiny. Rule number one in buying a house is to determine how much house
you can afford BEFORE you go shopping. The most aggressively market item in
society today is debt. The banks and mortgage lenders have devised numerous
ways to separate you from your financial future by qualifying you for a
mortgage that is guaranteed to make you “house poor”. The debt ratio for
qualifying for a standard conventional loan is 28-36% of your gross income.
For a non-traditional FHA approved loan the debt ratio is a more lenient
28-41% of gross income. As a result of automated underwriting, those with
excellent credit can qualify for an unbelievable debt ratio as high as 50%
of their gross income.
Determining how much house you can really afford requires that you complete
a few simple calculations. The number to use for calculating the allowable
percentage that you can afford for a house is referred to as your net
spendable income (N.S.I.). Your N.S.I. is equal to your gross income minus
your charitable giving, taxes and any pre-tax deductions such as qualified
retirement savings plans. Once you have determined your N.S.I. (same as
your take home pay), the allowable amount for the house budget is easy to
calculate. Since the budgeted amount for the house category should include
all of your house expenses, we’ll need to break it down.
For principle, interest, taxes and insurance (P.I.T.I.), you should consider
25-30% of your N.S.I. to be a maximum amount. For incomes over $60,000 per
year, the percentages will obviously need to be adjusted down. In addition
to P.I.T.I. there are utilities and miscellaneous house expenses that are
normally between 5-10% of your N.S.I. Therefore, the total budgeted amount
for housing expenses should be approximately 35-40% of your N.S.I. Another
rule of thumb is to keep the combined amount for what I call the BIG THREE
expenses (house, food, auto) within 60-65% of your N.S.I.
Just to illustrate my point, a bank loan for a conventional mortgage of 36%
of your gross income plus an additional 10% of your N.S.I. for miscellaneous
house expenses would equate to a total of 64% of your N.S.I. That would be
for house only! So you can see how quickly the answer to my wife’s
question, “If the bank will lend us the money” got us in trouble.
If you find that these percentages do not provide you with what you consider
to be adequate housing, then you must be willing to make some tough choices.
For a family to commit themselves to more than 40% of their N.S.I. for
housing will require them to always drive old cars, buy their clothes at
second stores, toys at garage sales, eliminate expensive vacations just to name a few of the sacrifices. This is called being “house poor”.
Mortgage lenders are more than ready to craft a deal that will allow you to
become their slave (Proverb 22:7) with no money down and no requirement to
pay private mortgage insurance (P.M.I.). P.M.I. is basically default
insurance for the lender. It is required when the lender allows you to
borrow more than 80% of the value of the house you are buying. Mortgages
are available in all shapes and sizes. In order to be able to continue to
sell debt to a society that is broke, mortgage lenders have been required to
become very creative with their mortgages. For example, the same lender
will package a mortgage with multiple loans that will satisfy the loan to
value ratios. By structuring two or three loans with loan amounts of
80-10-10, 80-15-5 or 80-20, they can offer you a package deal with 0% down
and no requirement to pay P.M.I. But before you get too excited you better
take a look at the interest rates. The 80% will cost you about 1% or more
above the going rate and the smaller loans will in most cases cost you an
additional 3% or more . This of course will depend on what kind of credit
risk you are to the lender. Just because it can be done does not make it a
wise choice.
Buying a house is a major financial decision. In 1926, 2% of all homes were
financed while 98% were debt free. By 1962, 98% of all homes were financed
while only 2% were debt free. The typical mindset of our current society
concerning debt is to borrow all you can (payment mentality) and make the
term as long as you can in order to keep the payments as low as possible.
A solid financial plan starts with a solid financial foundation. Before
buying a house, I would always encourage you to establish a cash contingency
account of three to six times your monthly expenses, eliminate all of your
consumer debt and have a minimum of a 20% down payment. When shopping for a
mortgage, look for fixed rate loans starting with a 15-year term. Do
everything you can to get compounding on your side as soon as possible. The
difference it will make in the long-term is well worth the effort. The way
to insure that your dwelling remains your “Home Sweet Home” is to get your
life in order financially before you buy your house. “Prepare thy work
without, and make it fit for thyself in the field; and afterwards build
thine house.” Proverb 24:27.
Mike Coe is the President and Founder of the non-profit teaching ministry,
Christian Oriented Education, Inc. He specializes in seminars, classes and
speaking engagements dealing with personal finance from a Biblical and
practical perspective. To learn more about his ministry you can link to his
web site www.coeinc.org. Mike will be doing a monthly feature on Christians
and their money, so stay tuned for more each month.
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