The Overweight Mortgage: 'Til Death Do You Part
I bought my first home straight out of college thanks to a first-time home buyer program in York County, South Carolina. The purchase price was $106,900. The day I signed the mortgage was one of the proudest days of my life. I have since sold that home and bought another, but this article is not really about the happy parts.
This article is about the many pitfalls I avoided along the way (due to wise advice), and I want to share some cautionary tidbits with you to help you avoid the watery death that comes with an overweight mortgage.
Avoid Upside Down Loan Situations
Let’s talk about the concept of what it means to be “upside down” in a loan. When you are “upside down” in a loan, that means that you owe more than you would recoup if you sold your property — home, car, land, etc. — today. Put simply, even if you made a sale, you would still owe a balance to be clear of that asset… which is no longer an asset, is it?
This is significant since if you have good credit, banks will often approve you for a bigger home loan than you can actually afford to repay. I use the word “afford” loosely here because if you decided to only work, sleep and eat Ramen noodles, you could probably enjoy using the ceiling amount to purchase that stellar home you think you need. If you want to eat normally, take in a movie sometimes or take a trip once a year, you probably don’t want to borrow anywhere near the maximum amount for which you are approved.
I was approved for $220,000 at age 20. Had I borrowed that amount, I would have certainly lost my home during the housing crisis as tax and insurance rates increased. And yes, I had a fixed-rate mortgage, but my loan’s interest rate had nothing to do with my land tax rates or insurance rates, did it? When monthly payments became exceedingly high for many (after they were already too high from the beginning), many homeowners had to quickly short sell their homes and make regular payments to banks for homes they no longer owned. Hence, they were upside down in their mortgages.
Any time you buy something you can’t really afford, you risk becoming upside down in the loan because you will likely have to sell it quickly to save yourself from credit ruin. Quick sells are often short sells, and short sells have balances… balances which must be paid in tandem with high rents! ;)
Take a Mortgage Preparation Course
How did I know that I could not afford to borrow the ceiling amount? I took a mortgage calculation course, courtesy of the said first-time home buyer program, and I ran my own numbers. When I factored in my actual and anticipated revolving costs (charity, lights, food, gasoline for home and car, travel, etc.), my comfort number was $99,000, over $100,000 less than what the bank would have allowed me to borrow.
If you don’t understand the ins and outs of home buying, including how much house you can actually afford, the need for maintenance savings, monthly payment options for land taxes and mortgage insurance, the importance of ALWAYS paying on time and the benefits of buying in certain areas, you shouldn’t buy a home yet. You need to take a course. Notice how I didn’t say read a book. I said take a course. Four to ten hours total can save you a lifetime of pain.
Buy for You, Not for Family or Friends
One mistake I can say I made is this one: I bought a house “big enough for guests.” In hindsight, this was a stupid way to make an investment. Because I had guests in mind, I bought a property with too much yard to maintain, too many rooms and bathrooms to clean and too many potential upgrade projects. What did all of this lead too? Though I was financially more comfortable, I still had higher landscaping costs and spent significantly more time in home upkeep than should have been necessary.
What I should have done was buy a home — even a condo or townhome — that met my needs: simple beauty, awesome kitchen, close to the airport and interstate, quiet and welcoming. Had I done this, I likely would have found a place for around $75,000 and enjoyed my early twenties (and my money) even more. I certainly would have massed a greater savings.
And guess what? Those guests… they are working and paying their own mortgages. They are probably not coming over. I can count on one hand the number of times I actually had guests in my first home. The same is true for how the guest roll looks for my second home. :)
Lastly, I want to advise you to think as far ahead into your life as you can. Your home selection should have something to do with where you see yourself in the next 5, 10, 15 and 20 years. If you haven’t had any time to consider those goals, don’t buy. This is important, because your home investment will result in profit upon sale— as mine did —if you have some idea of how you hope to end the buying experience. I knew I didn’t intend to stay at my first location forever, so I bought relatively cheap in a good area with high resale success. When I sold, I sold for $114,900, which was modest profit for a home sale but good money for a 22-year-old. How many homes did I see before I found that one? I walked in and out of 30+ homes, for months, with a very patient realtor who kept my goals in mind. That’s how I won.
Home sales are down right now despite low loan interest rates. Why is that? Many buyers who were taken advantage of in the first housing crisis are smarter. They are considering land tax rates and mortgage insurance rates. They are looking at the actual cost of home and property sales bundles. They are aware of what those monthly mortgage amounts really mean. You might want to be aware of these realities too. After all, if you end up in a short sell or foreclosure situation, your credit history will be affected by your blunder for a minimum of seven years, and you will likely end up in a high rent loop for ten years or more.
Some people never recover from home loss, and they just drown in it slowly. Don’t let that be you. Do your research ahead of time and train yourself to be ready for the ins and outs of the home buying experience. Let every property you buy be like the beginning of a happy marriage. Otherwise, you and your overweight mortgage may be bound together — in misery — until death (financial or ultimate) do you part.