My Biggest Home Buying Regret: Getting In Over My Head

I’ve made a lot of money mistakes over the years.  One of my biggest regrets was getting in over my head as a first time home buyer.

It was 2003 and, although the real estate market had been stagnant for years, the Alberta housing boom was about to begin.

Getting in over my head

The house I had lived in for the previous five years – co-signed with my parents when I was a University student – had just been sold and, after paying off a good chunk of my student loans, I was left with about $18,000 for a down payment on a new place.

My girlfriend (now wife) and I went house hunting and found the perfect starter home.  It was a brand new, 2-bedroom, 1-bathroom, 4-level split house that was a month from completion.

It came with a huge backyard, and the 3rd level gave us some extra living space that we hadn’t found in the other homes in our price range.

The market was starting to pick up; the builder incentives to include all the kitchen appliances, window coverings, and a tree for the front yard was pulled off the table a few weeks before we closed.

Related: 4 Advantages Of Building A House

I decided to buy the place and agreed to the asking price of $129,900.  That was only $100 less than what I was pre-approved for by the bank – talk about stretching to the limit.

In fact I was stretched much further because, at the time, I was only making $32,000 as a hotel sales manager in my first year out of school.

My girlfriend would move in and we decided to get another roommate to help pay the bills.

I only put 10% down, which meant I had to pay CMHC fees.  That added another $2,500 to the mortgage.

New appliances, window coverings and landscaping ate up the rest of my savings.  I was tapped-out by the time we moved in.

Related: How Much House Can I Afford?

Negative Cash Flow

Having a roommate to kick-in $400 a month would help to hide the fact that I spent more than I earned.

When he left eight months later to go work on the family farm, I went from living paycheque-to-paycheque to being $400 a month short.

Instead of getting another roommate I decided that things would be fine.  They weren’t.

I resorted to using credit cards to cover my cash flow shortage; taking out cash advances and running two cards right up to the limit.

In less than a year I had racked up $8,000 in credit card debt.  Things were getting so bad that at one point I had skipped a credit card payment and then borrowed money from my boss to make it through the month.

To make matters worse, I thought I had reached a dead-end in my career.  My direct supervisor (not the one I borrowed from) was incompetent and I felt she was holding me back from advancing my career.

Related: How A Career Change Improved My Life

Saved By A Lucky Break

At my lowest point, I broke down to my girlfriend and explained what was going on.  We’d have to make some tough decisions to cut back on our spending or we’d have to sell the house.

It took a few months but we got back on track.  We started a budget and cut back what we spent on groceries and dining out.

We managed to get our cash flow back to positive territory, but we were still living on the edge financially.

Then I caught a lucky break when my supervisor was let go and I was elevated to director of sales.  The promotion came with a $10,000 raise, which gave us a ton of breathing room.

Now I could afford to pay more than just the minimum monthly payment on my credit cards.  Still, at 19% interest, it was costing a small fortune to carry a high balance from month-to-month.

Related: 35 Ways To Save Money

I went to the bank and asked about a home equity line of credit.  The house was worth $190,000 now and had $80,000 in equity.

I took out a $25,000 line of credit and used it to pay off my credit cards as well as the remainder of my student loans.

Final thoughts on home buying

While the federal government took steps to reign-in the hot housing market last summer, the banks will do anything to keep the party going.

A mortgage rate war has already begun as we head into the key Spring selling season.

First time home buyers should be cautious not to get lured in by ultra-low interest rates.

Housing prices a decade ago pale in comparison to today’s over-inflated real estate market.  But the lessons learned from my home buying experience remain the same.

My biggest home buying regrets were:

  • Borrowing the maximum I was approved for by the bank
  • Depleting my savings on closing costs and furnishings
  • Not doing a proper monthly budget
  • Underestimating how much I’d rely on renting out a room for income
  • Overestimating my own income and opportunity for promotion

I was extremely fortunate to get a promotion and have my home rise in value at the right time when I needed help.

Related: Our Fast Track To Financial Freedom

But with wages flat and real estate prices falling, I’m afraid it won’t end as well for home buyers who get in over their heads this time.

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26 Responses to My Biggest Home Buying Regret: Getting In Over My Head

  1. Cody Hind says:

    Wow, no kidding about the lucky break getting that promotion at just the right time!

    I wasn’t in over my head but I was also a part of the Alberta housing boom (I had a place in Calgary) and I was quite lucky that the huge equity increase in a short time really opened up a lot of possibilities for me.

    So many people made the same mistake that you did of working out the numbers where they just barely make it and then don’t really consider what will happen if something unexpected happens and they are suddenly in a hole. Glad to see you made it out without too much harm done!

    • Echo says:

      @Cody – Rising home prices can mask a lot of problems. I know of a few people who were in the same boat as me but who kept rolling consumer debt into their mortgage.

      It was a perpetual cycle and now their mortgages are probably twice what they were when they first bought their homes.

      • Joe says:

        Exactly. What an awesome / honest post. It’s rare that a post actually captures my undivided attention and this one did, so thanks for sharing the story. Canadian realtors, mortgage brokers, builders (aka all people who stand to benefit from stupidity) make it seem like housing is a risk-free, inevitably profitable investment. That’s just not true. Sadly, we Canadians are about to learn a really really hard lesson.

  2. Sheryl (@CanadianGwen) says:

    I made a similar mistake in 2003 when purchasing my first home. We bought for $1,000 less than what we were approved for, and already had $15,000 in credit card debt before we bought.
    To make matters worse, we both used the max we could from our RSP, which might have been ok if we’d used it against the selling price. We used half, and the other half went towards closing costs, appliances (they didn’t come with the house) and other immediate “needs” like drapes and a trip to Florida. I wish the banker hadn’t told us the money didn’t have to be used on the house down payment.
    We were in real trouble by the time the mortgage renewed 4 years later, but real estate values had gone up so much, we just rolled as much debt as we could into the mortgage. That helped for the first few months, but we hadn’t changed our habits. We are divorced now, and at the time of the split, we had a negative net worth. 4 years later, I’m still paying that debt, but now I have changed my habits and hope to be debt free soon.

    • Echo says:

      @Sheryl – Thanks for sharing your story and I’m sorry to hear about your divorce. I’m glad you’ve changed your spending habits and you’re on a debt-free path. Good luck in your journey!

  3. You are lucky that your break came when it did. When I worked in mortgage collections, I always heard about people getting a house that was for their pre-approved amount. This amount is literally, all you can afford and you can’t really do anything else.

    • Echo says:

      @Grayson – I was in better shape once I had a budget and got my spending under control, but the promotion allowed me to accelerate how quickly I paid off the debt.

  4. Money Beagle says:

    We bought our house in 2007 at the upper range of what we wanted to pay for monthly payments. We made the assumption that pay increases would take place which would eventually lower our monthly payment as a percentage of income. Unfortunately with the economy, raises have been a lot less than they had and what my assumptions were built off, and since prices of other items have risen, you could argue that our percentage of income dedicated to our home has gone up. Part of that is attributed to having refinanced and added $150 per months in payment (but this results in a corresponding $500 per month increase toward principle), and while we’re not suffering, it’s definitely put a squeeze on our savings goals

    • Echo says:

      @Money Beagle – I think a lot of people make that assumption; we’ll get a raise or a promotion and so it’s ok to stretch and get the most house we can afford.

      Unfortunately, even if your income does rise it’s likely your expenses (or wants/needs) rise at the same rate.

  5. krantcents says:

    Whenever I bought a home, I always thought about if I could afford the payment at the time of purchase. My first home was a fixer and we assumed the existing loan. The payment was actually below the rent we were paying, but now I had to pay real estate taxes. I put the money aside via a payroll deduction. Then my income started to increase and my housing expenses as a percentage of income dropped. If you stick with that, you will never be in trouble.

  6. Mike Holman says:

    Interesting story. I did everything right when I bought my first house – conservative mortgage amount etc. Mr. Perfect was I.

    It was the 2nd house that did me in. :) It needed a ton of renos which we vastly underestimated the costs on.

    The house + reno costs + my wife deciding not to go back to work (great timing) meant we would have had to sell the house or be very house-poor had some relatives not bailed us out. Quite embarrassing.

    Oh well – it’s all in the past now.

    • Echo says:

      @Mike – Yeah, those renovations can spiral out of control pretty quickly.

      As Chilton said, the 4 most expensive words in the English language are, ‘while we’re at it…’

  7. One thing to keep in mind is that when the bank looks at your credit to decide how much you are approved for, they are making that decision based on what is on your credit report. They don’t know what isn’t there, such as how much your electricity bill is, how much you spend on gas or car insurance in a month, etc…

    Those are things that you as the consumer need to tally and make sure they are accounted for when you think about that monthly mortgage payment. They will tell you the max, but that doesn’t mean that you should spend it.

    I am glad to hear that you were able to turn this around. Good for you for taking those actions!

    • Echo says:

      @Lacy – that was one of my biggest mistakes; since I was pretty fresh out of school I didn’t really have a good grasp on my monthly spending and so I underestimated on all the discretionary expenses.

  8. Bet Crooks says:

    This must have been hard to publish.

    It sounds like “luck” that you got past this, but I think you made your luck through hard work and honesty.

    Kudos for sharing with us.

  9. Take all the elements of your story and change one fact: your house dropped rather than rose in value.

    In a nutshell we now see why so many homeowners lost everything. No only couldn’t they get a home equity line to pay down the credit cards, they were forced to sell their home for less than they owed on the mortgage.

    We all want to buy as much home as possible, but often don’t leave enough cushion for the inevitable trials and setbacks.

    • Echo says:

      @Kevin – you’re right, and that’s what I fear may happen with today’s first time home buyers.

      I definitely tempted fate and was lucky it worked out.

  10. Eric Putnam says:

    Great post Rob. I have seem similar stories as yours many times but unfortunately not all were able to “right the ship”

  11. BNgarden says:

    Thanks for this post. My biggest mistake was in multiples–we moved too many times in too few years, buying properties is expensive in hard cash terms. So while we benefited from increases in the market, the moves also cost us in rising house prices, legal, moving and realtor fee costs… Trying to stay put for a while!

    • Echo says:

      @BNgarden – Moving too often can be crippling to your finances. A friend of mine moved five times in nine years and it totally eroded his equity. In his case he would have been better off renting.

      Good to hear you’re staying put for a bit :)

  12. Angela says:

    Interesting posts and comments – thanks everyone for sharing your stories. I know those in the profession get a bad rap for their greed and I have to admit there are a lot of bad apples around but perhaps this is a good test for your realtor going forward. A conscientious realtor will advise their clients that they should shop below their max approved amount as inevitably buyers will want to make improvements and most underestimate the closing costs. A greedy realtor will let you buy at the top of your range as it is a bigger commission for them. Lesson for me as a realtor is to actively ask for this information when assisting my buyers rather than blindly accepting the price range they outline. If they don’t offer the info, I assume they know what they are doing but info from this post has opened my eyes to how I can better serve future clients.

  13. It’s easy to get caught up in the excitement of owning your first home. You start to dream and don’t wake up until your in too deep. The mortgage lenders and real estate agents will keep you sleeping, but in the end you need to have a reality check and ask yourself if you can really afford it. It’s like buying a new car … But that is another story for later.

  14. A similar Mistake says:

    Thank you for this post. I hope that anyone reading this post understands and sees the point of your story. Therefor to add to the seriousness of the matter I would like to add our story with yours to ensure any new buyer doesn’t make the mistakes we have along with you.

    2010 we bought our first home 485K. I recieved what I precieved as a promotion into management. The first year of the promotion I made approximately 10K more in. Therefore we spent that money doing some additional upgrades. 2011, BC economy crashes after the olympics and my pay dropped by 40%. We were lucky and got a personal loan to close all of our credit cards, family gave us a couple of grand and then I had to step down from my promotion because it wasn’t making the amount I needed.

    I stepped down from my promotion in 2012 and am back making where I was and have been living pay check to pay check with the knowledge that we are 2 paychecks away from financial ruin. Our budget will pay our loan off in 2 more years and all of the bills continue to be paid on time. No more wine on Fridays, no more golf, very little eating out and worse no vacation until next year. Good news is we have nevery borrowed our equity. I have approximately 20% equity in the house.

    To any one reading this I would strongly urge you to listen to these stories and think about the worst case senerio, bad case senerio and what if everything just stays the same. Factor all of your costs and if you don’t have a budget, MAKE ONE! Start by looking at everything that goes out of your bank account, credit cards and expenses. Do this for 3 months and you’ll be amazed at what you spend your money on.

    Friendly advice.
    A

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