First Time Home Buyer Series: Overextending and How I (Almost) Became Homeless

My experience almost becoming homeless taught me a great deal about what we need to be aware of when buying a home and the importance of having a stable finances. In this post, I will share a bit of my story as well as observations of what made the Great Recession so difficult for many people.

When you start to understand the financial implications of buying a home (ex: large amount of net worth tied up in home), it becomes a lot more clear as to why so many people lost their homes during the Financial Recession, and provides a cautionary tale.

Escalating housing prices that grew far faster (notice how housing pries powered through the 2,000’s recession?) than

the rate of wage growth (wage growth declined from the early 2,000’s recession and hasn’t fully recovered to date),

meant that buying a home became increasingly less affordable.

To ensure that the average working family could buy a home, programs were put in place to provide easier access to credit (more people qualifying for loans, and lower downpayment requirements). Combine this with a historically low interest rate environment,

and many people who wouldn’t have qualified for loans otherwise and were in less stable financial positions were able to buy $200,000, $300,000+ homes. Once the job market went south, a lack of Emergency Funds, and overextending when buying a home (buying the maximum that they could “afford” = get access to credit to), meant that it wasn’t sustainable.

When you consider that:
– most people aren’t educated on personal finance and on how to know how expensive of a house that they can afford
– many people were making a lot of money in real estate, and so the mentality was more “why not?” and FOMO (fear of missing out)
– Easy access to loans and lax lending policies

It really isn’t a surprise that people acted on the incentives and purchased additional homes, used the equity in their homes to buy toys like boats and new cars (that severely depreciate in value). Not that I was completely immune to this (for different reasons).

I experienced a lower stakes version of this myself. After graduating from university, I relocated to a new city for a job at my own expense, with the intention of being at that job for at least several years. 3 months after starting work and just after coming back from a vacation, I was told that my position had been made redundant. It took me quite a while to find a new job, and there wasn’t anything available at my previously high level of income (for that city). I ended up having to move and lost my deposit.

During the 6-8 months that it took me to find another “good” job, my savings dwindled and I would have been in a much more difficult position if my friends hadn’t let me stay with them, for which I am eternally grateful.

Just like the people who lost their homes, my losses were real, just on a much smaller scale than many others. However, this experience opened my eyes to the risk of overextending when purchasing a home and in blindly following what someone else says that you can afford (banks etc).

Years later, after working hard and saving diligently, I was finally in a position to buy a home. When I went on a trusted personal finance website and used their calculator to tell me how expensive of a home that I could afford, I was shocked when it came back with $446,000. That’s an expensive mortgage to pay off. I ended up purchasing a home for less than half of that amount, and slept much better at night for it.

So there you have it, in this cautionary tale we can see what NOT to do, namely don’t:

• Buy a house that you can’t afford (and not know it)
  • Instead, learn what you can afford here
• Not have an Emergency Fund to get you through tough times
  • Rather, figure out how much you need to be financially secure here
• Not know how much is smart to spend on a downpayment for your situation
  • Learn about which downpayment strategy makes the most sense for you here
• Use home equity to buy things that aren’t assets (and not know it)
  • Read more here to know if you home is an asset
  • Read more here to know if your car is an asset
• Not understand if your current job is high paying for your area, and if you could readily find another job at the same pay if needed
  • Read more here to figure out if now is the right time for you to buy based on your unique situation, including job prospects

As you can see, there is a lot that goes into buying smart. It doesn’t need to be overwhelming though. That is the purpose of this First Time Home Buyer article series.

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You’ll get exclusive access to:
– Over 6 hours of video content broken into easy to follow segments
– Custom excel worksheets to help you figure out your finance
– Checklists to keep you on track
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– The mindset and skillset to buy successfully