Personal Finance 101 - When to Buy a House

When I purchased my first home the week after I graduated from college, I did not have a clue what I was doing. All I knew was that I did not want to live with my parents. Don't get me wrong. I had great parents. I had been living on my own in college for four years and I enjoyed the freedom.

So why in Heaven's name did I buy a house in a neighborhood that was "in transition"?

Because my old man told me it was a good idea. That's all I needed to hear. I trusted him. He had already crunched the numbers and he knew it would be a good experience for me. After all, how big of a mistake can you make on a $15,000 house? My gross pay was $700 per month. I was loaded!

Now here is the message. I cannot believe what I've been watching and reading about the sub-prime mortgage fiasco. How could smart people deliberately loan 100 percent of the purchase price of a home at an artificially low adjustable interest rate with a monthly payment that the buyers had little chance of paying off during the life of the loan? The mortgage companies did it to make money. And they knew that there were enough people gullible enough to buy the loans on the market.

How do you avoid becoming one of the statistics? It's really pretty simple.

1. Do not buy a home unless you plan on living there at least five years.
2. Do not let your payment exceed 25% of your gross monthly income.
3. You should also have six months of your current income socked away in savings that you can access when you break your legs riding a scooter in the Bahamas.
4. And the most overlooked task is to sock away 10% of your gross income in some type of retirement account. A house isn't of much use to you when you retire if you do not have enough money to live in it.

Let's go back my first house. My monthly payment was $163.41(including principal, interest, and taxes). The payment was 23% of my gross. Check. I had no savings. However, I was allowed to borrow $18,000 because the house appraised for $23,000. So, I moved in and got a check for $3000. That was almost six months of income. Check. I told you my old man was smart. And I was actually able to save about $100(14%) per month until I met my future wife. Qualified check. But I'm sure you've all heard the story of Eve in the Garden of Eden. 'Nuf said.

As for the rest of your money, spend it!