It is a situation that reminds me of the villain in the popular Harry Potter films. “He Who Shall Not Be Named.” Well, instead of a, “He,” it’s more of a, “That Which Shall Not Be Mentioned.” Do you know people in your neighbourhood, neighbours of many years or new neighbours, who suddenly had their homes foreclosed on?
People, who for one reason or another couldn’t maintain their mortgage payments, had to move out. We commiserate with them and talk gingerly about their circumstances without outright saying the, “F,” word. Of course, we also talk about them and their circumstances after they have left. It’s human nature.
Yet, while it is happening, the neighbourhood is reluctant to use the dreaded, “F,” word. As if uttering it will cause a contagious domino effect. In 2018, there was a 44% increase in home foreclosures. That equates to over 30,000 Americans homes being forcefully evacuated by people, real people with families and ambitions, who couldn’t keep up with their mortgage payments.
Consider How Much of Your Income Pays Your Mortgage
I anguished over writing this piece because I do not want to come off as judgmental. My intent is to inform and educate. A foreclosure can happen to anyone. I’ve seen it happen to neighbours. I know if I don’t maintain my own finances that anything is possible. The best way to guard against, “it,” is only to buy a home if you can truly afford it. And to have a realistic percentage of your monthly income dedicated to paying for a mortgage.
An Average Mortgage Payment
Paying for a mortgage is a delicate balancing game. The average mortgage payment is about $1,200. Although, there will always be additional expenses. Like food, homeowner’s insurance, private mortgage insurance, homeowner association fees, repairs, utilities, credit card bills, and other monthly or regularly recurring expenses. Many homeowners pay double, triple or more of the equivalent of their monthly mortgage to satisfy their additional home-related expenses.
Debt to Income Ratio
How much of your income do you dedicate to paying your mortgage? And, other home-related expenses? As just evidenced, when you own a home, you pay for multiple expenses, not just a mortgage. If well over 30% of your monthly income is being used just to pay the mortgage, you may be financially overextending yourself. The best way to know for sure is to calculate your debt-to-income ratio, or, DTI.
Your DTI is one of many calculations that a mortgage lender may use to assess your eligibility for a mortgage. A DTI is simply the totality of your monthly debts divided by your monthly income. Imagine that you pay $1,200 for your mortgage and another $1,400 for your other bills every month. Now imagine that you have a yearly income of $55,000 a year. If your monthly bills equal $2,600 and your monthly income is $4,583, then your DTI is 56%.
That means 56% of your income goes to paying your mortgage and home-related bills. It also means, that if you face a financial emergency, you may not have enough money to pay next month’s mortgage. This is a simplistic calculation. You must assess your own finances and bills and realistically assess whether or not you can pay a monthly mortgage.
Play the Waiting Game
Attaining maturity is all about embracing enlightenment and patience. Appreciating the difference between want and need, the sacrifices required, and the time needed to attain such. I didn’t get to own my own home until my mid-30s. There is no shame in realizing that perhaps it may take a few more months, or years, to realize your dream of home ownership.
Take the time to save more money. Get your DTI as far under 40% as much as possible. Rehab your credit as much as you can. Give a mortgage lender minimal reasons to deny approving your application. The only thing worse than never owning a home is experiencing the dreaded, “F,” word.
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