Home Ec Class was for sissies: learning to balance a home budget and bake from scratch was beneath me. After all, I was going to college for goodness sakes! Many of these 'vocational' courses including shop class (which I was not allowed to take as a girl) were chopped in favor of academics.
So now we wonder why adults don't know how to balance their own checking accounts? We have become accustomed to believing the readout from our ATM machines as an indication of our monthly net worth!
While I know many people have planned thoughtfully and could not forsee their retirement accounts, home values and jobs cut by 40 and 50%, the truth is -- so many folks are in trouble. The rules have changed drastically. As a country and an industry, we do need to take some credit for suggesting ever increasing home values and economic growth, coupled with the refrain: 'you can always refinance later'.
Is no wonder many don't understand their mortgage commitments! After all, you sign a stack of papers with words like "Promissory Note" at the top. Not one borrower has asked me what that meant. I counseled a Realtor recently who helped his elderly mother into a 90% Pay Option ARM using his income to qualify. Incredible. The banks involved are facing lawsuits for just these tactics. One must wonder if this person actually knew what that 'sweet low payment' was all about.
The Plain TRUTH is that most people have gotten into financial distress over a period of years by living in denial. We are not a nation of worst case scenario planners. Even those who did plan for the downside (I can think of one very thoughtful builder who did) are caught way below their worst expectations. Damage control plan E and F are being enacted. Coupled with less than fully lucid financial planning, the average non planner is in deep. Way deep.
Telling Question: At what age would you like to have your home paid for? It just doesn't occur to folks that paying off their home is not only a sound idea but will free up their capital for other life issues. Like, uh, retirement for example? And that quaint idea of saving. Perhaps this is returning now.
So--what can you afford today AND tomorrow? I now ask people to complete a household budget as part of their first consultation. I get a blank look. I hand them the standard budget form. This most basic tool is part of every Buyer's Ed class. You can take it online. or through your local counseling. The course is full of great information on the realities of home ownership.
Everyone is different! You see, on the standard loan application, your living expenses are not taken into consideration at all. Or how many mouths you have to feed, or how far you have to drive to work, or how many kids are in college or such things as disabilities or other ongoing issues that might cost you more to than the next person. Only your monthly credit and housing costs are considered. After that, you're on your own to work it out.
Which is a wonder that even FHA allows 50% debt to income ratios -- using your gross income to qualify you for a loan. 31% is the new 'affordable' target debt to income ratio according to the Making Home Affordable program....an example of perfect hindsight.
Here's a link to a good budget tool. Spread the knowledge!