Of all the spending decisions you make, housing is the most important one. It’s probably your biggest expense, so it’s essential to get it right. Doing so is one of the most important keys to being able to live generously, save and invest adequately, and live with financial margin and peace of mind.
How Much of a Down Payment Should I Make?
It used to be normal for people to make a down payment of at least 20 percent. That became anything but normal during the run-up to the housing bubble, and look where that got us.
Putting 20 percent down demonstrates the discipline to save. Plus, it prevents you from having to pay private mortgage insurance.
How Much Can I Afford to Pay Each Month?
Lenders typically tell people they can afford to devote 28 percent of their monthly gross income to the combination of their mortgage, property taxes, and homeowner’s insurance. When you include other debts, such as credit card balances, student loans, and vehicle loans, they want all of those monthly payments plus housing to total no more than 36 to 40 percent of your monthly gross income, depending on the lender.
I’ve come to a different conclusion. The ideal is to spend no more than 25 percent of your monthly gross income on housing, and have no other debt—preferably no more than 20 percent. And here’s the kicker: It’s best to be able to afford a home on one income.
What? That’s impossible, right? Well, the common approach to money in our culture is to save too little, carry too much debt, live with too much financial stress, and fight about money too often with the people we love. Do what’s uncommon and you’ll be able to enjoy uncommon financial success and peace of mind.
Basing housing costs on one income is especially important for young two-income couples that want to have kids one day and also want the freedom to have one person step out of the paid workforce while raising those kids. But it’s important for others as well. Buying a house that requires two incomes is risky. What happens if one person loses their job?
What If I’m Spending Too Much on Housing?
Please don’t shoot the messenger, but if you’re spending much more on housing than what I just recommended, your finances are probably going to be a challenge. It’s going to seem impossible to give generously or to find the money to save or invest. In that case, you should consider something radical, like moving to a more affordable house.
I know – it sounds crazy, completely unrealistic. Selling a house can be tough. The whole process of moving is time consuming and disruptive. But I’ve met people who have done exactly that. They were living in houses they realized they could not afford and they moved.
One couple put their house up for sale at a time when other homes in their community were sitting on the market for over a year, and yet theirs sold within 30 days and for nearly the full asking price. The other, after selling their home, decided to live in the basement apartment in the home of some friends. They stayed there for three years as they saved up enough money for a healthy down payment on a house they could truly afford.
Both couples took really tough, counter-cultural action, and they got to a better place financially, emotionally, relationally, and spiritually.
For most people, housing is the expense category that can make you or break you. Getting it right is essential if you want to experience uncommon financial success.
What are your thoughts on my housing recommendations? Take a minute and figure out what percentage of your monthly gross income you’re spending on housing (mortgage, taxes, and insurance). If you’re spending more than 25 percent, how are you making that work? Is it working?