This morning I learned (from NPR, of course) that more homeowners than ever right now are first time homebuyers currently renting. Rather than looking for jaccuzi tubs and vaulted entryways in McMansions, they're looking for a mortgage that they can afford if a memeber of their household loses their job. Seems reasonable, doesn't it?
In fact, one wonders how homebuyers evolved away from making affordability their #1 criteria.
Which brings me to a story of a young couple who, nearly 15 years ago, decided to buy their first house. We'll call them Green Girl and Mr. D. They were D.I.N.K.s--earning about $70,000 annually between her teacher salary and his sales commission. They'd lived in a modest 2-bedroom apartment for a couple years and had saved a down payment for their first house (in addition to monthly investments in their retirement accounts).
Mr. D had a background in banking and finance and determined that they could afford a mortgage for a house valued between $75,000-$110,000. Bearing that range in mind, our young couple scoured the classifieds. Mostly they found 3-bedroom ranch-style homes which Green Girl did not want. They enlisted a real estate agent and explained their dilemma. They wanted a character home for about $100,000. It had to be within a short drive of their jobs, in a reasonably decent neighborhood, and could not require a lot of work. In other words, they'd settle for a $90,000 home if it needed new carpets and paint because they had to have an allowance for said updates.
The agent took them around. Naturally Green Girl and Mr. D fell hopelessly in love with the first house and predictably they were outbid and lost it to another family. The attractive young couple rallied and continued their quest for their Starter Home.
(Let me pause here and explain the Starter Home. It's a house that is affordable in the short term plan. It's not the Forever House, it's an investment where an equivalent rental payment will go into Home Equity which will build up over 5 or more years enabling one to then sell their Starter Home and move into a Forever House.)
Their grand tour of Wisconsin ranch-style homes ended with an excited phone call. "It's adorable! It's exactly what you want!" the agent enthused. Green Girl and Mr. D agreed to check it out.
On a quiet street, in a regular-sized city lot stood a yellow house with burgundy shutters. The front part was the original house, added on at the back side creating 1,200 square feet. Green Girl walked through the 3-bedroom, 2-bathroom, L-shaped structure with a detatched 2-car garage. The carpet was new, the walls mostly white. The front part of the house (2 bedrooms, kitchen, dining) had wood floors! The basement was unfinished! Sure, the current owners had 2 gigantic dogs and a narsty smelling kennel behind the garage but Green Girl loved this house.
"How much?" asked Mr. D.
The agent told him a number, but he knew there was no point negotiating because his lovely bride failed to conceal her delight and determination to live in this darling house!
A week later, Green Girl and Mr. D went to a bank. They wore their work clothes, presenting their best professional appearance. They nervously waited to hear if the bank would lend them $85,000. They prayed. They hoped. The banker returned and explained that they could borrow up to $400,000 for their Starter Home.
Aghast, the couple felt sure there had been some mistake. No, the banker assured them, they qualified for a loan worth over four times the amount they wanted. Well, they explained, we want to buy some new furniture and go on a vacation once a year. We'd like to go out to eat once a week and keep investing in our retirement accounts. They left the bank taking not a penny more than they'd agreed to borrow and marveled at any fool who'd do differently.
Green Girl and Mr. D moved into their little house--at first whole rooms were empty as they saved for furniture. Eventually they bought more furniture, a lawn mower, a new car. They kept investing in their retirement accounts and paid for Green Girl's graduate degree. After living in their little house for 5 years they had a baby and Green Girl started working part-time. They made their choices based on what they could afford, not on what they wanted or what their friends possessed. In retrospect they see how that banker's offer could cloud one's judgment and make them do foolish things, dare to dream too big and risk losing everything.
Don't borrow what you can't afford to repay. Be smarter than your bank. Know your limits (credit and otherwise). Pay for your needs first, then your wants. Happily, it sounds like first-time homebuyers today understand those basic rules.