"Should I buy a house now?"

Q: Should I buy a house now?

A: NO!

Q: Why?

A: Because you should never buy a house when you are not sure that is what you want to do, and you should never let someone else make that decision for you.  Don’t EVER give anyone that much power over your life.

As part of our exuberant expectation of CHANGE, I will be starting a series called “First Hundred Days”.  It’s not enough to vote for change and then sit around waiting for change to come from someone else.  If each of us does something different every day for the next hundred days, that produces a change for the better…then change will happen.

I will tag all posts “First Hundred Days” and I will do my best to include all of the tools and skills you should employ to make your own decision about buying a home. We hear so much about “the stupidity” of people in trouble.  Instead of criticizing, let’s do our best to help the future buyers of homes make better decisions and choices by providing meatier, education oriented, instructional blog posts.

The first step in the home buying process does not start at the lender or the real estate agent.  It starts with you sitting in your own home working through some numbers.

1) Calculate your gross income.  If you are salaried, you have the number.  If you are commission based or hourly, add the last 12 months income to the previous 12 month income and divide by two.  Now double check it by taking the last 3 months income and multiplying it by 4.

Let’s say you are hourly or salary plus commission/bonus.  Note these are not lender guidelines.  These are old-fashioned and proven standards for responsible decision making and so will likely be more conservative  than lender guidelines.

Non-salaried income Last 12 months: $75,000

Non-salaried income previous 12 months $60,000

Current annual income for home buying purposes = $75,000 plus $60,000 divided by two or $67,500.

Now the double check.

Total income for the last 3 months = $14,000 (boss gave you fewer hours)

$14,000 times 4 (12 months) = $56,000.

The double check system suggests that you should not think about buying a home in the near future based on an income of more than $56,000 a year, and you should not buy a home until you are certain that the cut back in hours is not leading to no job at all or even fewer hours.  Stabilize your income situation before buying a home.

If the last 3 months income is $20,000 times 4 or $80,000, you still use $67,500 as your annual income and not $80,000, for homebuying purposes. 

You use the average two year income or 4 x your latest 3 month income, whichever is LOWER.

I’ll stop here and see if people have questions before going to the next post in the “First Hundred Days” series.  When you buy a house…if it is the wrong decision…you can blame lots of people, but you will be left holding the bag.  So let’s work together over the next hundred days to make sure you can answer the question for yourself without heavily relying on the opinion of others.

Treat the series like a workbook, get a notepad, and calculate your numbers.  Questions?  Ask them in the comments section.

54 thoughts on “"Should I buy a house now?"

  1. Ardell wrote:

    “Q: Should I buy a house now?

    A: NO!

    Q: Why?

    A: Because you should never buy a house when you are not sure that is what you want to do, and you should never let someone else make that decision for you. Don’t EVER give anyone that much power over your life.”

    Reminds me of the lines from a Devo song:

    The next thing I say to you will be true.
    The last thing I said was false.

  2. It’s not just income and expenses. You should make sure you have enough emergency savings to pay the mortgage and your other expenses for a while if you’re laid off. In my case, I made sure that I could go at least a couple of years without any income.

  3. John,
    If it was obvious to everyone, no-one would have subprime mortgages and no-one would have payments they never could have afforded.

    If the real estate community had been giving out legitimate advice like this all along we might not have as big an economic disaster as we do right now.

    I’m talking about organizations that write biased “news” releases and hand out pamphlets on “why it’s smart to buy now” when I say that.

  4. Sampai,

    You would be amazed at how many people count their income incorrectly. In 100 days there will be many more steps, including the one you mention.

    The first step is calculating the income right, which is a boring step for salaried people, but I ask for your patience.

    In 18 years I have yet to meet an hourly or bonus wage earner who calculates the income correctly. Most try to do it the same as salaried people and get surprised when lenders don’t agree with their calculations.

    It’s an important step for many.

  5. Actually, if someone’s income has gone down over the past few months, it’s likely an underwriter will question it. VOEs are done on most files where the employer (assuming not self employed–that’s a whole other topic) will need to complete stating amount of hours and likelihood that the income will continue.

    If I may add, I often see potential buyers who receive a bonus and think they can include it in their income for qualifying. In order to use bonus income, the borrower show that they have received it for 2 years and will continue to. (full doc). I won’t go too much into guidelines, because that’s not what your post is about.

    I do think this is a great base line for potential home buyers to consider–it even applies to someone who’s considering renting a home.

  6. Thanks Rhonda,

    I mentioned the last few paystubs in particular because often that hurts the seller as well as the buyer, if the buyer doesn’t know that in advance. Often those last paystubs are asked for while the property is in escrow.

    I have had clients who cut back on their hours while house hunting for the last 2-3 months before buying a house, and after they have loan approval to buy a home at x price. I haven’t personally had an escrow cancelled for that reason, but I have seen it happen many times over the years.

    As for bonuses, I used “salary plus commission” and will edit that to say “salary plus commision/bonus”.

    Almost every hourly paid person I have ever met takes their current hourly dollar amount and annualizes it, even if they are expecting a raise next week. We can’t write enough on this topic, as far as I’m concerned, as many young people calculate their income this way, and in the past have gotten erroneous pre-approval letters as a result.

    I used the VOE “likelihood of continued overtime” letter in my “What Should a Loan Modification look like” post, as there is nothing stopping an employer from discontinuing overtime and bonuses the week after they wrote that letter. In this economy, people need to be more concerned about what may happen, even if they can get a letter like that from their employer.

    I’m trying to make this a “no one to blame but yourself” tutorial, so that people do not rely on other people’s letters about their income, etc… As I said, the buyer is the one left holding the bag, and not the boss who wrote the letter saying there were no plans to cut back on overtime.

  7. sampai,

    May I ask if you are a single income or double income household? You are more conservative than the standard I will be using in my posts on this topic. I don’t know many young people starting a family who have two years of expenses in the bank…nor will I be recommending that amount when the topic comes up. 3-6 months of total expenses is the normal conservative position. I’ve never seen anyone suggest two years, but it could depend on the job they have, like maybe an actor who waits tables between gigs 🙂

    Giving people unrealistic guidelines isn’t very helpful in my experience. If they can’t follow the advice, it’s not worth giving. Though I do commend you, I hope you are not expecting the entire Country to have 2 years of expenses in the bank before buying a home.

  8. Ardell wrote: “sampai, May I ask if you are a single income or double income household? You are more conservative than the standard I will be using in my posts on this topic. I don’t know many young people starting a family who have two years of expenses in the bank…”

    Ardell, planning for two years without income–it should be obvious to you. Sampai is obviously a real estate agent! 😀

  9. Kary,

    A lot of my ideas come from a man named Harry Gross whom I adored and listened to on radio when I was a young adult. He always said to live on one income and put the other in the bank when preparing to buy a home. I was just wondering if Sampai did that, or saved two years of income and 20% down as a single person.

    His rule was you never buy stock unless you have 6 months of expenses set aside in the bank. He said until you have 6 months expenses in the bank, you don’t have “an extra dollar” to buy stock with.

    I doubt he’s still living…I guess he was my Suze Orman, from what I hear about her. When I first saw her I thought she did exercise videos for buff muscle girls and haven’t watched her since. I was never a buff muscle girl who kick boxed 🙂

    Maybe Kevin knows where I get that visual from.

  10. Good one Kary.

    2 years + 20% is a lot of money. I’m picturing about 160K, or over 8 years of savings for someone beginning a typical career. Not an amount usually attainable in one’s 20s for a normal college graduate.

  11. 20% down plus 2 years isn’t something likely for a first time home buyer, but it is possible for others.

    Besides my joke about the income fluctuations of real estate agents, I think another point can be made about sampai’s plans. Restraint!

    So many people want to push their limits just to get into that home that is is just 2-3 extra levels of nice, pushing the limits of their financial abilities. It’s nice to see someone that isn’t quite so materialistic. Rather obviously if you have 20% down and two years of savings after, you could alternatively more to a nicer, more expensive house.

  12. Another good point. If the 100th post comes up with a maximum you can spend, that doesn’t mean you should spend that much. It is often better to spend less and save more if you can.

  13. Cautious Buyer,

    Long before post 100 we will be out looking at property, and how to go about doing that. Even if someone is not going to buy a house for quite sometime, it’s good to go out and see what your money can buy for comparison purposes. We will be talking about “roof math” and various home components, and Kary and I will be discussing reasonable expections of roof condition 🙂

    You are reminding me of a couple that came into my office in 1993 and said “we want to spend 20% of our gross income on housing payment.” I miss those days when everyone decided for themselves, stemming from a joint decision between husband and wife vs. asking a lender or agent how much house they could afford. We can help make a new generation that knows the answer to “Should I buy a house now” without asking the opinion of complete strangers who have no vested interest in the outcome.

  14. Roger,

    I was working on the Step 2 post when I saw this comment flash by on my screen. It reminded my of that saying that made no sense to me as a City Girl “Who’s going to buy the cow, when you can get the milk for free?”

  15. Pingback: Count all the money you wasted this year | Rain City Guide

  16. Ardell:

    Someone also said “There’s a sucker born every minute”!


    “No one ever went broke underestimating the intelligence of the American People”

    But seriously, you should consider consolidating it all into one downloadable file, and micro-market.

    The convenience alone would be worth $5. Even in tough times, some conveniences are worth paying for.

  17. Jonathan,

    Do you really think it is wise for buyers to risk their Earnest Moeny and for sellers to take their property off market thinking it is sold, and rely on underwriting as the source of info?

  18. “They (loan underwriters) are actually making sure you can afford that house, odd.”

    That clearly has NOT been the case in recent history, Jonathan. Perhaps we will get to that day again…but that day is not today.

  19. Pingback: Don’t Pay Off Bad Credit | Rain City Guide

  20. Pingback: From Rain City Guide: Should I Buy A House Now?

Leave a Reply