Time and time again, I hear homebuyer wannabes state that the reason they are still fence-sitting is that they don’t want to end up in the same trouble the last generation of homeowners did.
Well, I say, there’s a very slim chance of that happening, given the changes in the market climate: Homes are at rock-bottom prices (not sky-high), and mortgage guidelines are so conservative it is nearly impossible to even find one of the zero-down, quick-to-adjust, stated-income mortgages of yesteryear.
With that said, though, there is a handful of rules today’s homebuyers and homeowners can follow to dramatically minimize the chances they will ever face losing their homes:
1. Never a borrower or a lender be. OK, so maybe NEVER is strong, but you’d be surprised at how many foreclosed homeowners actually bought their homes with conservative loans and at low prices many years ago, but got into trouble taking new mortgages and pulling cash out at the top of the market (then not being able to refinance or make the adjusted payment at the bottom).
Today’s homebuyers can avoid this fate by starting out their homeowning careers with some ground rules in place around borrowing against their homes.
A good (albeit conservative) place to start is this rule: Decide not to borrow against your home equity for anything but well-planned home improvements.
Here’s another one: Whatever you do, don’t borrow against your home to lend money to someone else. I’ve seen dozens of homeowners over the years borrow to make an "investment" in a friend’s business or to lend money to a child or a parent. Borrowing against your home’s equity to make an investment in a business you know nothing about is a complete gamble with your home. Don’t do it.
2. Stop financial codependency. Related to the rule of thumb about borrowing to lend is this change of the bad habit of financial codependency.
I see this come up the most often when homeowners borrow money against their home or tap into their emergency cash cushion (leaving themselves unable to make their mortgage payments if they lose their job, etc.) to help an adult child make their own mortgage payments or bail them out of another crisis situation.
It also comes up where one spouse supports another spouse’s habit of overspending, debting, underearning, gambling or even substance abuse, and ends up going into a financial hole as a result. Over time, these cases can create the temptation or even desperation to further leverage your home, and can run through a savings account, leaving the homeowner exposed and vulnerable in the face of a temporary disability, job loss or recession.
There are a number of powerful books on the market about how to cease being codependent including the Melody Beattie classic, "Codependent No More," but many people struggle to recognize they even have this issue until it’s too late. Here’s a hint: If you regularly use money to protect a loved one from the natural consequences of their behavior, you are engaging in codependent behavior.
3. Stay conscious. Going on money autopilot, without occasional check-ins, is the root of many financial woes. Many money experts recommend automating your monthly payments so that your recurring bills are paid on time, every time. And almost any homeowner will vouch that there are few bills that seem to come up as frequently as your mortgage!
The problem is that once you automate your payments, it’s very easy to fall into the habit of simply ignoring your actual statements — and they may contain information that flags issues before they snowball into serious problems.
A client of mine recently realized that through no fault of her own, and despite never having missed an auto-payment, her home was facing foreclosure — all because the bank had somehow erroneously started crediting her payments to someone else’s mortgage account!
Also, financial autopilot mode can support habits like overspending and overdebting; the minimum payments may always get made without much attention from you, but the overall balances will rear their ugly heads and possibly pose a threat to your ability to pay your mortgage, in the event you ever face a job loss, medical bills or other financial crisis.
4. Do your own math before you buy. Only you can know the full extent of your non-housing-related financial obligations and values. Things like catch-up retirement savings, tithing and charitable giving, private school tuition, medical costs and the like can take big chunks out of your monthly budget that your mortgage pro is not accounting for when he or she tells you how much of a mortgage you’re qualified to borrow.
So, before you ever speak with a mortgage broker, it’s up to you as a responsible buyer and adult to get a very clear understanding of your own personal income and expenses, assets and priorities, and to use that knowledge to decide how much you can afford to put down and to spend monthly for a home.
Fortunately, I see an increasing number of buyers doing this, and actually choosing to buy a home that costs much less than they are technically qualified for.
5. Don’t buy a house to fix a family or psychological problem. In Alcoholics Anonymous, they admonish addicts to avoid what they call "pulling a geographic" — moving to a new neighborhood or town to try to run from your problems and bad habits.
They caution against expecting the move to solve the problem on the grounds that, in the words of mindfulness guru Jon Kabat-Zinn, "wherever you go, there you are." If you have bad habits in Chicago, moving to L.A. doesn’t purge the bad habits — only working on the actual dysfunction itself will do that.
I submit that there’s a real estate-specfic version of pulling a geographic, which we’ll call "pulling a residential." This is where people buy a home or buy a new home in an effort to cure a deeper family or psychological issue; sort of like that old (and equally bad) idea of having a baby to try to save your marriage.
If your children are fighting because they lack personal space, that’s one thing. But if there are deeper issues going on with your children, your family or your relationship (even your relationship with yourself), do not fantasize that owning a home or moving up is going to automatically solve them.
In fact, the opposite is often true: The larger the financial and maintenance obligations that come with a home, the more a mortgage and property taxes can add strain to already troubled relationships.