Home Ownership: Can your kids really afford that house?
“Our recently married son is looking to buy a home: How much of a home can he and his wife afford and how much should they put down?”
This is one of the most common and important questions I’m asked each year. My initial response is to “please proceed with caution.” Buying a home before they are ready is one of the most detrimental decisions I come across with young adults, not only as it relates to their finances but to their marriage.
The mortgage and banking industries have tremendous incentives to mislead young couples into thinking they can afford more than is realistic and that renting is ‘throwing money away.” Do not let them base their decisions on what their friends are doing or what the bank/mortgage broker is telling them they “qualify for.” Many young adults base this decision mostly on the monthly mortgage payment and compare that number to their existing rent. Much of this is impacted by today’s low interest rate environment, which on the surface sounds good but also drives up home prices.
For those of us who have owned a home long enough, we certainly understand that the cost of home ownership goes well beyond just the monthly payments like taxes and insurance. Maintenance alone, depending on the age of the home, can add another 1-5% in annual cost.
Additionally, it is not uncommon for young adults to change jobs multiple times early in their career. Locking into a home or location may force them to either miss out on a better job opportunity somewhere else, or force them to sell the existing home possibly during a poor real estate market, or force them into being a reluctant landlord.
The extra costs associated with home ownership can often force young couples to neglect their retirement and college funding responsibilities and force them to live with very little emergency cash margins. Making them feel like they can “never catch up”, much less get ahead.
Beyond the finances, it also can place undue pressures on their relationship. Instead of having the time and money to enjoy different experiences together, they may find themselves allocating their money and weekends to Home Depot.
These are some good guidelines to let them know whether they can afford a specific price point:
- A minimum 30% down payment, plus
- 6 months’ worth of emergency savings, plus
- 1-5% additional yearly savings for the maintenance of the home, depending on the age of the home
- Do not use retirement money (IRAs, 401k’s, etc.) for down payment
Home ownership is indeed a big part of the American Dream for many. With proper planning and patience, it can also be a key part of a sound financial plan.
So, can your kids really afford that house?
