Marcus Home

Can You Afford to Buy a Home?

Mortgage brokers and banks can use a formula to determine whether you can afford to buy a home, but there are other factors to address before you take the home-buying leap. 

by Marcus Lifestyle Team

People recently saw me post on social media that running a home is like running a business and they lost their minds! Just as in business, homeownership requires serious financial literacy to be successful. First-time home buyers especially need to do their homework, but what I share below applies to everyone. 

Money In/Money Out

The financial aspect of running a home is the same as running a business—not the emotional aspect, the financial aspect. The way I think about it is very simple. In a business, when somebody walks through our door or buys our service, they give us money. We take that money, and we need to spend money to keep that business going. We must pay our employees; we must pay our rent. At the end of the day, the business is successful if more money stays in the business than what leaves. 

When I consider the home, I think about it the exact same way: the amount of money that comes into the home, which is the income that you make

from your salary, retirement investment accounts, stock dividends and other earnings should go on the left side of your home P&L as income or as revenue. 

The opposite side of that is all the money that it takes to keep the house open for business. Taxes, mortgage or rent, utilities, maintenance, food, clothing. At the end, you’d hope that the amount of money that comes in is in excess of the amount of money going out. That’s how you begin building a savings account. It’s really simple math.  

The Credit Crunch

What happens to people is that because credit can be so easily available to us, either through credit cards or second mortgages and other loans or lines of credit, people get confused. I don’t mind people having lines of credit available to them on their home or on a credit card for a rainy day. There could be an emergency that requires you to need additional funds. But when you are running your life on a deficiency—meaning there’s more going out to keep the house functioning than there is coming in—and you’re filling that deficiency with a line of credit, you’re living a lifestyle and writing a check that you can’t cash. And that’s what gets people in trouble. 

Making Good Choices

There are choices to make if you want to become a homeowner. You might say, “I wanted to have every streaming service at my house,” as opposed to choosing one streaming service because that’s what you can afford. Or you say, I would like to have three cars, when you can really only afford to have one. Or, I would like to have really nice clothes, but you have to have either less clothes or you have to be more selective.   

People get mad at me because they say, “Well, you don’t have to make those choices because you have money.” I didn’t always have money. I’ve been blessed to have money today. And I’m one or two decisions away from losing it all, like all of us are.  

Beyond Percentage of Income

People often ask me about what percentage of income you should dedicate to a mortgage, but there is no clear answer. The size of your family, your work situation, or the proximity you need for healthcare or schools, changes a lot of that. What you have to understand goes back to the same principle: There’s a finite amount of money coming into your home. And there’s a finite amount of money that has to go out. You may make choices around rent or a mortgage payment that will cause you to have to make other sacrificial choices. That is where people get confused.  

I believe that your primary expense should be your home. It’s where you lay your head at night. It’s how you keep yourself healthy. It’s where you keep you and your family nourished. That should be the primary thing that you splurge on because it’s going to make your life better. You may have to give up other things temporarily until your income or something else changes that will allow you to afford a home. 

What is PMI or Private Mortgage Insurance?

Ideally, you should have at least 20% of the purchase price as a down payment on a new home. With less than that, most lenders require private mortgage insurance (PMI) to protect the bank’s investment. This is because when a bank lends more than 80% of the appraisal value of a home, the lender’s risk increases. So, this is insurance that protects the lender, not you. Most often, the insurance premium will be rolled into your mortgage payment, increasing your monthly outlay. Some people do not have much money to put down on a home but can afford a high monthly payment. In that case, PMI may work in your favor. When the value of your home increases and you gain more equity, you can apply to have the PMI removed.

Mortgage Details and Budgeting

Before you buy a house, you have to consider whether you will have the budget and the income to afford to maintain that house. In addition to buying the home and getting a mortgage and having a mortgage payment, you may have Private Mortgage Insurance (known as PMI; see sidebar], which will add to your monthly expenses.

Then you need to factor in maintenance—everything from servicing the air conditioning units or repairing your roof to landscaping. All of those things need to be considered from a

gross investment standpoint, and which you should list in the “money out” column. If your “money in” is less than this on a monthly basis, you will need to find a way to recalibrate to be able to afford the home.