Smart Moves by Ellen James Martin

Tips for Debt-Wary Young Homebuyers

When the financial downturn hit in 2008, most millennials were still in school, with other things to think about than serious financial matters. But now in their prime home-buying years, many are reflecting on the life lessons learned during that recessionary period.

“Young people ... remember how many in their parents’ generation struggled with foreclosures, short sales and other problems involving real estate. They don’t want the same thing to happen to them,” says Sophia Bera, a 33-year-old financial planner who heads a firm focused on clients in their 20s and 30s.

“So many young homebuyers are saddled with student debt. That alone has made them resistant to overspending for a property,” says Bera, a fee-only planner affiliated with the National Association of Personal Financial Advisors (

Of course, it’s tough to restrain mortgage borrowing to the limits of personal comfort for many whose salaries are growing slowly, if at all. A recent report by Attom Data Solutions (, which tracks housing markets throughout the country, found that it costs in excess of 43 percent of average wages to cover house payments in more than a quarter of U.S. markets.

Even if you’re a first-time buyer lucky enough to live in an area with reasonable housing costs, you’ll still want to be cautious about taking on a larger mortgage than you can comfortably afford. To be sure you won’t overspend, financial analysts say it’s wise to carefully calculate your living expenses before committing to a purchase.

“Run the numbers and make sure you stay skinny on your overhead,” says Dale Robyn Siegel, a home loan broker and author of “The New Rules for Mortgages.”

Your core living costs are expenses you must meet on a regular basis. They include outlays for food, transportation, child care and insurance coverage. They may also include any financial commitments you’ve made to a religious institution or charity. Together, these expenses constitute what many in the financial field call your “nut.”

“Your first task is to ensure you’ll have the funds to meet your nut every month. Otherwise, your stress level and quality of life could leave you greatly impaired,” Siegel says.

Here are a few pointers for first-time buyers:

-- Carefully calculate your core expenses.

Arlen Olberding, a financial planner affiliated with the Garrett Planning Network, urges would-be homebuyers to take a step-by-step approach. As a first step, carefully review your bank statements to see where your money has gone during the past six to 12 months.

“When it comes to spending, people are creatures of habit. Because of that, looking back at your personal spending history should help you project your future spending,” Olberding says.

After categorizing your past spending, it’s time to comb through the columns, determining which among your non-mandatory costs you’d be willing to trim.

“Establishing financial priorities is a very personal matter. There are no right or wrong answers,” says Olberding, who specializes in helping middle-income clients meet their money goals.

Once you’ve calculated your living costs, along with quality-of-life choices you consider essential, it’s time to compare this monthly total to the net income you’re bringing in. The difference should be the funds available to cover your mortgage expenses, along with home upkeep and utility costs.

-- Realize that lenders could let you overshoot your budget.

After the recession, mortgage lending standards became stringent, and still remain so. Yet ironically, Siegel says many who can jump over lender approval hurdles are still able to borrow more than they reasonably should. Why? Because the full extent of their living costs isn’t apparent to the lender who reviews their file.

For example, when assessing your affordability range, a lender won’t take into account private debts— -- like the regular payments you owe your mother who advanced you the money to buy a new car.

“If an expense doesn’t show up on your credit report, the bank doesn’t know about it,” Siegel says.

-- Factor inflation into your living-cost calculations.

Although the government’s Consumer Price Index has shown little movement in recent years, inflation is still a factor for many households. Especially hard hit are families with young children who face hefty daycare costs.

Along with child-related expenses, health-care costs have also risen dramatically, led by the cost of employee contributions to health plans and the premiums paid for the kind of individual policies used by those who have no access to insurance coverage through work.

“At any age, medical care costs can sneak up on you. This is particularly likely if you’ve had an accident or a major illness and you incur big co-pays for treatment,” Olberding says.

In assessing their living costs going forward, Olberding advises clients to factor in average price increases of as much as 5 percent per year for their core expenses.

“No one is immune from inflationary increases. So, it’s always better to err on the high side when you’re preparing a spending plan,” he says.

(To contact Ellen James Martin, email her at