Build Affordability In Your Spending Decision Process: Part 2 of 2

The first part looked at the affordability to buy items other than a house. The second part will examine the affordability of buying a private home. In addition, we will discuss these two issues:

  1. Who decides affordability?
  2. What should happen to people who live in households that cannot pay?

Affordability [to buy a home] half …

The ability to purchase your home, with or without a mortgage, so that the estimated total costs do not compromise the home’s current and projected budgets, plans, and commitments.

A home is a great commitment

In Canada, from the 1960s to the early 1980s, except for a few brief periods, when you bought your home, you laid the foundation for a large, predictable, tax-free capital gain. Typically, when you sell that home, the tax-free profit would be substantially higher than inflation. These days, depending on the time and location, selling your home bought after the mid-1980s can make a profit or a loss. Still, if you didn’t buy to resell, this shouldn’t be a problem.

In the early 1980s, using credit, Americans went on a spending spree. Greed was rampant and, as in many areas of the economy, house prices turned sour. For example, the Canadian housing markets in Vancouver and Toronto sizzled until the mid-1980s, when prices fell. The depression lasted almost 10 years. So in 2008, it shouldn’t have come as a surprise when, following a similar path, US home prices plummeted. Also, we should expect house prices to stay low for a long time.

Although they wouldn’t admit it, governments encourage irresponsible spending. Look at how the economy works! Consumers must spend to keep it growing, even if it means using high-cost debt financing. Still, governments continually seek us to spend.

In the 1970s, the United States Congress passed the Community Reinvestment Act …

“… to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and strong banking.”

In retrospect, safe and sound banking, was meant to be read with a “wink, wink” facial expression. Not to be outdone, the Canadian Government’s Housing and Mortgage Corporation of Canada says they “… work to improve Canada’s home financing options, to help Canadians who cannot afford a home in the private market.” .

They have this crazy, irresponsible and absurd statement on their website:

“A way to help [low-to-moderate income] homes is to provide them with a home equity loan so that they can qualify for a conventional mortgage. The loan … in effect, reduces the income needed to obtain a mortgage. “

Before buying a home, understand all the effects of home ownership. Beware of the lie that if you don’t have enough funds today, increases in property values ​​will help you own a home today. At best, it’s a potential trap to keep you in a refinance cycle. That’s the government funding method that led to America’s subprime mortgage debacle.

Owning a home may involve most or all of these annual expenses (unless otherwise noted):

  1. Mortgage payment that can go up or down
  2. Tax transfer (one-time)
  3. Property insurance and taxes
  4. Repairs, maintenance, heating, lighting costs.
  5. One-time legal fees and several small expenses.

However, renting a house includes a monthly payment with the responsibility for maintaining the grounds and often the responsibility for heating and lighting. You have no other expenses.

Who decides affordability

Governments try to define affordability for us. They want households to use the same reckless Ponzi-style funds that they use to waste taxpayers’ money. Reject their approach. Each household must decide if it can afford to buy a home.

Each of these criteria should be applied before concluding that you can afford to buy a home:

  1. You are debt free.
  2. Working with a monthly budget.
  3. Know your housing needs. For example, will family size increase anytime soon?
  4. Have at least 20% down payment for a conventional mortgage.
  5. Understand and accept the sacrifices necessary to pay your full annual housing costs. What might you have to give up to pay these costs on a regular basis?
  6. Understand the current and projected state of the economy and the housing market, and feel reasonably comfortable being able to finance your total housing expenses for six months, even if you were laid off.

What if you have to give up your inaccessible home?

To master this challenge, separate two decisions. First, can the homeowner pay for his current home? Second, if not, how can we work with her to provide affordable housing?

If the person or family cannot afford the house by my definition, skip to question two. Do not try to give the supposed help by reducing or deferring the mortgage for a few months; that is dishonor and waste. Disgraceful because it gives the impression that the family will be able to keep their home. Then, in a few months, the family must give up the house. Then focus is wasteful, because time and money are wasted knowing that the family must leave the house.

In these situations, focus on lifestyle counseling and financial planning. Emphasize lifestyle issues like affordability, budget, the anatomy of a mortgage, and administration. Teach the virtues of renting when people can’t afford to buy a house. Yes, it is a virtue. Some property deals give homeowners significant risks without equity. That is why many mortgages in the US are higher than home values.

While receiving temporary housing counseling, people should work with churches and charities to prepare them to live in rented houses. This could be a long trip; But if people reject the victim’s path and learn from their mistakes, it could be rewarding.


Today, people rush to own their homes and go deep into debt as housing costs make up a large chunk of their monthly budgets. Be patient, rent until you can buy. So you build a solid financial foundation and reduce financial stress.

Copyright (c) 2011, Michel A. Bell

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