Should We Buy A House?
Hey Leo,
I have a question for you. My husband and I just got married last year and found out last week that we are expecting a baby. He has a daughter and I have a son so this will be our first together, and we are very excited.
However, we are currently renting a small two-bedroom twinplex and would very much like to buy our own house and have a nursery for the new baby. Our credit scores aren't great and we wanted to get a consolidation loan to pay off all our debt since we are only paying minimum payments at outrageous interest rates right now and getting nowhere fast.
The banks have turned us down for this loan for our credit being so bad. Any suggestions on where we can turn? The whole point in us getting this loan is to help boost up our credit scores, but no one seems to care about that.
Signed,
"Drowning in Debt"
Dear Drowning:
Congratulations on the new baby.
Sit down and write those banks who turned you down a thank-you note. You signed yourself "Drowning in Debt", and you think a mortgage will improve that? A mortage AND a new baby?
Debt consolidation loans do not PAY OFF YOUR DEBTS, they simply move it around. Be a minute late with a payment and your rate will probably go up.
Robert Kiyosaki, author of Rich Dad, Poor Dad, calls a single family home the single worst investment a family can make. Why? Among other reasons because of the upkeep. Now you can call the landlord. If the roof leaks in your own home, you are responsible for fixing it and paying for it.
I'm hoping some of my readers will leave comments on their own horror stories, thinking their own home was going to solve all their problems. I know those stories are out there because I hear them all the time.
I promise you, without a dramatic increase in your income and proper money management that house will, in short time, be an anchor around your neck. My advice to you is to hunker down where you are or find a bigger place to rent for the price you are paying now.
Don't spend your time and energy looking for more loans or buying a house with "no money down". Work on increasing your income. Your credit will improve as you pay your bills
on time.
I don't mean to sound harsh but I'm hoping to impress upon you that a new house AND a new baby are probably too much to take on based on what you've told me.
Good luck!
posted by Leo Quinn @ 11:54 AM
16 Comments
16 Comments:
Once you move into a house there are a world of things that you don't realize ahead of time that you will need such as curtains, cleaning products, paint, a lawn mower, a snow blower, etc etc. This list goes on and on.
Now having a baby, costs you lots of money also. Clothes, food, medical bills, toys, etc etc.
Add these two things together and add in your overwhelming debts and you my friend, are in trouble!! Listen to Leo, he knows what he is talking about. When you finally become a homeowner someday, you want it to be a pleasurable experience, not one that causes you un-needed stress trying to figure out how to pay the mortgage.
As I read this, I am listening to the sounds of 2 fans and 2 dehumidifiers running --in my wonderful, mortgaged 120% house. We found a leak, and even though we have a wonderful insurance agent and good insurance, we are going to be out thousands of dollars to pay for the plumbing repairs, mold removal (it had been leaking in a wall for who knows how many months). This is a house that we had built seven years ago. Since then, we've had THREE different places in the roof that leaked, we have had termites swarm (thank goodness we had a contract) in TWO places, and we had to replace the five year old air conditioner last year. The joys of home ownership!! It's like owning a luxury car -- even if you can eek out the initial investment, unless you have thousands of dollars (or can get it) at your disposal, you will not be able to maintain any place on a level that will suit you or your neighbors. Use that enthusiasm to pay off your other bills, with a little stash towards the "dream home" each month as well. Creating the self control to pay off your debts will mean so much to you, and will set such a great example for all those children who are learning from every step you take!! Good luck and God bless you!
Leo's right - there are LOTS of unexpected expenses when you own a home vs renting. I think the main ones are the maintenance issues - electric, plumbing, etc.
I would say start working a plan and once you're out of debt, start seriously saving and you will be in that house in a couple of years.
Great advice Leo. We needed more space too and did this by moving to another town just 27 minutes from where we lived previously. Got all the extra space we needed for the same dollars. Utilities cheaper too. Then my wife found a job here in the new town for more money. I sold real estate for years and know that every one wants to buy their own home. But the time to look, the time to get your best deal, is when you have all your financial ducks in a row.
As a friend of someone who bought a house while they had some debt I would suggest that you do not buy a house and continue to rent the one you have for the time being.
My friend actually landed up in even more debt and the bank was going to foreclose and sell the house from under them, furthermore, the bank took judgement against her & her husband and now they can not get any type of credit. I suggest that you consult a financial advisor to draw up a budget. I would also like to suggest that they look at the internet and log into a website that has ideas to economise
My husband and I bought our house two years ago. We didn't have the greatest credit at the time and regular banks wouldn't finance us. We eventually found a house for what we could afford and financed it with a VA loan (not the best option but it worked for us). We didn't have many problems until recently. We needed a new faucet as the one we had was leaking and we were unable to stop the leak. Because of the way the old faucet was installed we wound up replacing all the pipes under the sink costing about $100-$200 (instead of less than $30 for the faucet). Thank god my father could help us or we would have spent more on labor. Then we had a clog in the main sewer pipe. While having this clog removed it caused the pipe to crack. The clog returned a week later and started water pouring into our basement whenever water was put down the drain. This meant no showers/baths for me or my children, no laundry, and dishes done in a stock pot with water thrown out on lawn. We used the toilet but flushed every other time if possible.
If it wasn't for a very generous sewer company and a local American Legion I would have had to pay almost $4,000 for this repair.
I would suggest that if you really want to buy a house look in your community for an agency that can help you with your debts and getting them in line. (I work for a Community Development Corporation, a non-profit, where we help those who are looking to buy a house get their finances in order and improve their credit score before buying a house all for free.)
I agree that each situation and family is different but buying a house right now may not be the best option. Try another job or better job or moving to a new area where the rents are lower.
Thanks Octavia!
I loved the line...
"The business income is how we really save, live, invest and vacation, all while raising our daughter!"
Multiple streams of income are the way to go!
Selling coloring books to businesses? That's great. Who woulda thunk it?
Would love to talk to you about the biz. Please drop me a line.
Thanks!
Leo
If I'd had any idea of what a house does and needs ... sure it's good on tax returns, but after buying a house for cash, we now have had to mortgage & re-mortgage and re-re-mortgage (you get the idea) to cover repairs, roofing, plumbing, and all the other things no one tells you about.
My next home is going to be a 1 bedroom condo with a maintenance contract and No Yard!
I'd like to add my own horror story to the mix here. I was married to my (soon to be ex) wife about 5 1/2 years ago. About 3 years ago we bought our first house.
We had decided it was something we should do, and we had no want for encouragement. Everyone thought it was a great idea. The only snag we hit was that neither of us had good credit at the time. It wasn't terrible, but definitely not good.
So we bought some books and searched online and found several "tricks" to help us to improve our credit scores. These "tricks" worked, and we were not only able to buy the house at a great interest rate, but also get a personal loan to help renovate and also get several credit cards.
That is where the real problems started. As I said above, our credit scores were not great. There was a reason for that, we had poor financial habits. Fixing the score only made things look better, like a coat of paint on a rusted out car, it hides the problem for a short while.
Shortly after, we started having problems paying all the bills, and this only got worse until, flash forward to today, we are selling the house and hoping we can do so quickly because we are almost sunk.
The financial strain has taken its toll on our relationship. I won't say it is the only factor, but it played a major role in leading us to divorce.
The good news is that we expect to get enough out of the sale to pay off the mountain of debt we have accumulated and maybe still have a little bit left over.
The better news, at least for me, is that I have realized that, although the "tricks" worked to fix my credit score, what would have been far better in the long run would have been fixing my financial habits. If I had done that before buying the house, I really don't think we would be in the position we are today.
It isn't easy to change a lifetime of money habits, but trying to brush them under the rug by consolidating or using credit fix "tricks" will only make things much worse when the bottom falls out.
My advice to you would be to figure out exactly why you are in the financial position you are in today, and then take definite steps to fix the root cause. That is the only way to ensure you will provide for your future, and that of your children.
Good luck!
Chris
Even after reading Rich Dad, Poor Dad, I buckled to the peer pressure of the older and "wiser" folks I worked with. Shortly after closing on a house I never should have been qualified to buy in the first place, I found out the previous owner had not obtained the proper permits for the basement finishing he did himself. All the sudden, the local tax authorities are coming after me (still in litigation - even after I walked away from the house!) for back taxes of nearly $2000 and I hadn't even brought the first box of stuff from the old house. And there were the roof leaks towards the end of our first year there. And there was the broken water main, inside the utility room, setting me back nearly 3 grand. I was never so happy as the day I became a renter again.
Leo is so right about this. Please listen! I tell people this all the time. I learned the hard way--ended up in debt and divorced and am a happy renter again, free as a bird. The thing that blew me away most were the surprise property taxes as your property value goes up (and it does!)--each and every quarter we had to scrape up a couple thousand extra dollars to pay what should have been in Escrow to cover it. Two healthy incomes, one young kid. But we still couldn't keep up! Property value going up, that should be good, right? I kept the place by myself for 1 year after the divorce and just got further and further in debt. No money, no sleep worrying about it, no fun!
Please listen to these wise people. Enjoy your sweet baby! Don't buy a house yet. You'll enjoy life so much more.
I have some questions? I am under the impression that interest is still a deduction on your personal taxes. If you rent,someone else is getting the deduction! Also, I live in an area that property values are going up at between 10 & 12 % per year, call it a forced savings if you will but it is equity. I have seen people make over 100,000 in a matter of two or three years. If people sell only to get into a nicer more expensive home with more debt, then yes that is not a great move. But I see people all the time that have sold a home in an expensive part of the country and move to Idaho, were they can buy a really nice home for hundreds of thousands less than they sold thier previous home for, thus giving them more to retire on.You can't do that if you rent. I feel the key is buy a home that you can afford , about 25% of ones gross income.The more creative they get on the financing the more apt they are to run into trouble down the road. My son is single and lives at home. He is a saver and pays all his loans and bills off early. He pays over 1/3 of his income to taxes. Wouldn't it be smarter to take that amount and put it towards owning somthing that grows in value and equity? And thus reducing his tax liability? The key is to buy what you can afford and pay your bills on time and keep your credit score above 700 so you get the lowest rate when you need credit.I have also owned some rentals in the past and the depreciation deduction on two of them offset our tax liability.We did have some nigthmares,but all in all we made money. thanks aaron (my wife is one of your clients)
If I may make a suggestion -- I am a community educator in financial management through a county Cooperative Extension -- every state has Cooperative Extensions in each county, and most all of them provide consumer education in financial management skills and budgeting, and some even offer a first-time home-buyers class. Please avail yourselves of these free and confidential services in your county before saddling yourselves with a mortgage that you may not be able to handle as yet.
Proper planning and preparation will help you both go a long way in acheiving your goals -- please get the help you need -- especially since it is free -- your local Cooperative Extensions are there to help you, and many people do not know all the options they offer -- check them out by looking in your phone-book. If you are not familiar with Cooperative Extension, look for
4-H or Master Gardner programs --they are administered by Cooperative Extensions and will lead you to the proper department.
On the other hand:
Everything said about debt is true.
Taking on more debt when you are drowning in debt doesn't make any sense.
However, once that issue is settled, I encourage you to buy a house. We have found the tax break and permanence of homeowning to be a valuable stabilizer both financially and emotionally. You may get richer quicker some other way - but unless you have a great deal of discipline, probably not. There is a reason so many middle class Americans buy a house - because for many of us, it works!
As the saying goes, if I only knew then what I know now... when my ex-husband and I were in the process of dividing up property, we were trying to decide what to do with the house. My parents were very insistent on me keeping the house, which I ended up doing. I bought my ex out and lived in the house for 2 1/2 years afterwards. Had I really thought clearly about it, it would have made more financial sense to sell the house outright and sock away the cash for another time. I know my parents meant well, but it really worked a financial hardship on me to keep the house. I'm still trying to get myself out of debt from that little adventure!
After I took a new job five hours away, I also learned the hard way that real estate doesn't always sell as quickly as you would like it to. My fiance and I are currently renting and are both grateful that we don't have a mortgage or maintenance repairs to be responsible for. While I do miss having a house, I don't miss the added responsibilities of caring for one.
I'm a Leo Quinn believer and even I made the mistake of buying a house in 2008. ARGH! I stuck to my guns for years and was able to rapidly pay off a lot of debt - then I got caught up in house buying fever. Wanna know when I regreted my decision? Oh about 12 seconds after I signed the purchase agreement. Thanks to Leo's philosophy we've still been able to make headway with our debt even with a house, but I know it would be going a lot faster without one.
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