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Get to teach friends difference between "afford" and "able to make payments" tonight

vi edit

vi edit

Elite Member
Super Moderator
:sigh:

One of my best friends got married last month and him and his wife are looking to buy a new house. Unfortunately, neither of them know the first freaking thing about budgeting, planning ahead, or simply the difference between being able to "afford" something, and the ability to "make payments" on something.

They've been through the pre-pre approval process and the bank tells them that they can "afford" a $140,000 house, and they take that as a sign of approval that they can actually afford that much.

Here's the thing though. They are 25, and 24 years old. They barely make 60k gross combined. This is a couple that on average has less than $100 a month in their checking accounts. They put EVERYTHING on credit card. They have ZERO put away for retirement. She's a nurse looking to take a lower paying job at another hospital. He's not even a full time employee and is paid hourly with no benefits. In two years she wants to quit working and go back to graduate school leaving only his meager income to pay the bills, and they want to throw kids into the equation somewhere too.

Can we spell disaster? In their minds, if they have $1500 a month left over a month after all bills are paid(not counting current rent), then they can afford a $1500 a month house payment. The bank agrees with them...and that's the problem 🙁 The bank says they can afford the house, but all they are truely saying is that they can make payments on it.

It's going to be a rough time tonight explaining this stuff to them. :frown: I've got to tell them about saving for their future(IRA's, mutal funds ect), tell them the necessity of a nest egg(minimum of 2 months worth of payments saved away), emphasize the ability not able to tell the unknown and needing to have money to pay for it.

Why oh why can't they teach these things in a required class in high school. Budgeting 101 followed up with Investing and Savings 211 right after it.

Have any of you been in this situation before...acting as the Budget Professor? Any suggestions? Anything I've left out?
 
That scares me. Between my girlfriend and i we make alittle less than your friends, i COULDNT think about moving into a $100,000 house.

Do they realize they have to pay for home insurance, or bills, or maintenence?

Hell, i am debating whether or not to even find another apartment for $650 a month, or stick with the one we are at for $550 a month.
 
your absolutely right, how can they put a down payment on the house with only $100 in the checking account, and if they dont put into their iras/401ks what do they expect to do after retirement?

have they thought about incidental expenses like a new water heater or termites or what not, and IMO they should have at least 3-4 months for morgate and bills in a money market account just in case.

With no benefits how do they pay for medical insuranse etc.?


oh well people dont know how to budget. its too bad.
 
vi_edit

I think you need to ease up and understand not everyone is sucessfull and smart like you. You should be proud of what you achieved and planned ahead. But not everyone in US in same position as you are, we live only once and we have to live to it's fullest. Sometimes things happen we don't expect you can't protect yourself from everything. No matter how you plan sometimes things happens and you can't stop it. Only thing you really need to think about your health and family. There parents in this world who achieved all of their goals and can't have children and they are parents who didnt achieve anything blessed with children. Godforbid you gonna have some disease or not be able to have chilren where you gonna take the money you saved up ? to your grave? donated it all in the end. rant over
 
It's not them being able to afford it right now that really scares me. It's them thinking that in two years once she go's NO TIME at work...meaning ZERO income for two complete years that DOES scare me.

I asked them about what they were going to do about 1. school tuition, and 2. house payment. Their reply - Student Loans DOH!!!!!!

My friend...the hubby...only pulls in about 22k. He's in a field that pays dick until you "prove your worth". Once you have proven yourself, then you can get hired on full time and make *up to* 40k a year. Of course, this is just if's and butt's at this time so who knows if he'll ever get hired on full time.

arg!
 


<< Where do yo guys live? 140k homes and 550 for rent? man that is such good prices. >>



$550 in clarkston michigan. There is a lake not more than 300 feet from my porch. 🙂

Nice area, bad neighbors...:frown:
 


<< vi_edit

I think you need to ease up and understand not everyone is sucessfull and smart like you. You should be proud of what you achieved and planned ahead. But not everyone in US in same position as you are, we live only once and we have to live to it's fullest. Sometimes things happen we don't expect you can't protect yourself from everything. No matter how you plan sometimes things happens and you can't stop it. Only thing you really need to think about your health and family. There parents in this world who achieved all of their goals and can't have children and they are parents who didnt achieve anything blessed with children. Godforbid you gonna have some disease or not be able to have chilren where you gonna take the money you saved up ? to your grave? donated it all in the end. rant over >>



this has nothing to do with how smart or successful he is. it has to do with his friends and how they need to think through their descions. from what he has told us they are not ready to buy a home yet. but they are only 25 they have time.
 
When my wife and I got pre-approved they said we could get up to $210,000. We bought a $140,000 house.

Every realtor I spoke with told us not to buy a house at the maximum we were approved for because we'd be screwed. Make sure they're aware of this.

(all though it sounds like you already will 🙂 )
 
Glad you're looking out for them...there's nothing worse than being "house-poor". Plus it's not just the mortgage payments to consider, there's all the extra expenses with utilities, trash, water/sewer, fixing stuff that breaks (no landlord any more), taxes, etc. My wife and I aimed slightly low with our house and I'm glad we did...it's a tad small for us, but at least we have money available to work on it and such as we please. Not to mention buying furniture to fill it....it's pathetic when you see a couple with a nice big house and cinderblock+2x8 "furniture" in it.

Fausto
 
When I was that age I did the same thing. Living from paycheck to paycheck (though from the sounds of it they have also built up credit card debt which is something I didn't do). Planning for the future was not in the program, though I was contributing to a 401k at work, just nowhere near the max. The problem is, the only way to get around it is to actually have money left over one month, then you start to realise that it's better to have extra money from month to month than it is to set your budget equal to your paycheck.

It is tough to explain the difference between "affording" something and simply being able to make the payments. The easiest thing to do is add an item to the monthly budget titled "savings". That's what I did to eventually get away from living paycheck to paycheck. I budgeted a monthly amount to go towards savings. It was money I could not touch. Eventually it just came natural to actual budget what I could afford, and not what I could make payments on. It's not something that can really be taught, since what we are really talking about is will power.
 


<< vi_edit

I think you need to ease up and understand not everyone is sucessfull and smart like you. You should be proud of what you achieved and planned ahead. But not everyone in US in same position as you are, we live only once and we have to live to it's fullest. Sometimes things happen we don't expect you can't protect yourself from everything. No matter how you plan sometimes things happens and you can't stop it. Only thing you really need to think about your health and family. There parents in this world who achieved all of their goals and can't have children and they are parents who didnt achieve anything blessed with children. Godforbid you gonna have some disease or not be able to have chilren where you gonna take the money you saved up ? to your grave? donated it all in the end. rant over >>



Wduaqnug
I understand what you're saying and respect your right to say it. But I feel that you are missing the point. Vi_Edit is one of the more gracious folks on this forum. He's not bragging; he's trying to be a pal and save these young IGNORANT people from dooming themselves to financial ruin. Everything he said in his original post was right on the money. The difference b/t "afford" and "make payments" is not readily apparent sometimes. Sometimes, even not to some of us who are a bit older than 24. 😱 He's just trying to help. I'm sure he's "been there, done that" as far as managing money goes. We all have.
 
My advice to you is to start drinking heavily.

Have gone through similar experiences with teaching folks the basics about finance, and I do so no longer.

Often, people blame the messenger for teaching them the basics, as if it's the messenger's fault and not their own responsibility.
-PCM
 


<< I think you need to ease up and understand not everyone is sucessfull and smart like you. You should be proud of what you achieved and planned ahead. But not everyone in US in same position as you are, we live only once and we have to live to it's fullest. Sometimes things happen we don't expect you can't protect yourself from everything. No matter how you plan sometimes things happens and you can't stop it. Only thing you really need to think about your health and family. There parents in this world who achieved all of their goals and can't have children and they are parents who didnt achieve anything blessed with children. Godforbid you gonna have some disease or not be able to have chilren where you gonna take the money you saved up ? to your grave? donated it all in the end. rant over >>



Somebody has been playing a little too much puff puff pass.

Anyhoo...I'm doing my best to look out for them. They are coming to me for advice and the best I can tell them(after pointing out all things said) is that it simply is not meant to be at this time. I'm trying to get them to just stay content in their rented condo for a couple more years until after she gets out of school, he has a more concrete job, and they actually have some funds to play around with. At that point they won't have to compromise on a house, and can actually get something they *really* want instead of settling for what they can make payments on now.
 


<< But not everyone in US in same position as you are, we live only once and we have to live to it's fullest. >>


Until the repo man comes by, at least.
🙂

 
This also spells disaster for the subsequent offspring of these two. Many people, myself included, learned good budgeting and saving techniques from my parents. If these two will be living from paycheck to paycheck for the next 20 years, their kids will likely grow up to do the same.

Good luck!

-geoff
 
You forgot about the tax perks for owning a house. 🙂

My wife and I did the same thing. We were about 22-23 years old when we got our house. We did get the house for $86k. We were making less than $40k/year. No savings. Living check to check. We got the down payment money from her parents. Things worked out.

Unfortunately we are now paying ~$1500/mo for the house including the second mortgage due to the financial problems induced by my wife's illness.

The first mortgage (I'm not sure about the second) is on a 15yr, tho. Not a 30yr.

amish
 
My wife and I were in the same boat. We qualified for a 300,000 house and settled with a 200,000 one instead. There is a certain amount of budgeting you have to do. Else, you will eat Mac and Cheese and Ramen for the next 5-10 years. Kids also factor into that. I agree, you don't want to live in a shack if you make good money and can afford a house. I don't like cheap bastards who think that way. I do agree that you have to factor in everything and then look at your budget and live within your means. My wife and I didn't get our house until a year after we were married when I was 27 and she was 26. I am 29 now so they have plenty of time to save up plan for the future.
 
What doesn't help is that my fiance an I are their best friends. We bought a house back in May of last year and they have a SERIOUS case of house envy. It's rather unpleasent competition that we don't really try to bring on, but it's very apparent.

My fiancee and I make a fairly significant amount more a month than them, and it gets tight with us at times...and our house only cost $120k, and we put nearly $6k down on it to cover closing costs and an a 3% down payment.

They have no down payment, no cash to cover closing costs. They'll be doing a 100%(if not more including closing) financing.

And yes, this will be discussed over beer and dinner 🙂
 
A general rule of thumb is that you can afford up to 2 1/2 times your gross annual income for a house (i.e., $60K/yr = $150,000 home). So the bank telling them $140K is reasonable. However, you need to stress that this is the -maximum- that they would be able to afford. And that's if their other debts are under control, i.e., no maxed out credit cards, other loans, etc. I forget the percentage (you can find it on the 'net), you should not have more than 28% of your gross income allocated to loans (student, cc, car, house).
But it falls back to the maximum they can afford vs. what would be comfortable. Living within your means, buying a house that only costs $80-90K, and leaving a cushion to afford investing towards retirement, unexpected expenses like a new A/C when the current one goes out this summer, and even little things like going out to dinner & a movie. If they mortgage the maximum that they can afford they'll need to realize that they're cutting out all of the extras...
 


<< Where do yo guys live? 140k homes and 550 for rent? man that is such good prices. >>


I live on the eastside of Cincinnati. I pay $475/month for a two-bedroom (~ 900 square feet) apartment.
 
Yeh, they have a car payment that's around $325 a month for another 3.5 years or so. They also are looking to purchase another car.

To add salt to the wound, her(the wifey) best friend who was in their wedding is looking to buy a house in a nearby neighborhood with her newlywed husband as well. That couple makes close to 100k a year.

It's really just a bad situation of their friends having houses and them being envious. I can imagine how they feel, but they need to realize that us other two couples are in different situations.
 


<<

<< Where do yo guys live? 140k homes and 550 for rent? man that is such good prices. >>


I live on the eastside of Cincinnati. I pay $475/month for a two-bedroom (~ 900 square feet) apartment. >>



I pay $475 + water (usually around $500 total) per month for a 700-square foot, one-bedroom apartment. In a semi-crappy complex in a semi-crappy neighborhood. don't feel too badly. 🙂
 


<<

<<

<< Where do yo guys live? 140k homes and 550 for rent? man that is such good prices. >>


I live on the eastside of Cincinnati. I pay $475/month for a two-bedroom (~ 900 square feet) apartment. >>



I pay $475 + water (usually around $500 total) per month for a 700-square foot, one-bedroom apartment. In a semi-crappy complex in a semi-crappy neighborhood. don't feel too badly. 🙂 >>


Crap I pay $575 to live in a 20x12 studio. You guys are living it up!
 
No to mention property taxes, utilities, furnishings, repairs, appliances, and maintenance of the yard... the list goes on and on!
 
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