Houses can be great long term investments, or they can drag you into Bankruptcy. They are usually your biggest investment, and your largest debt burden. Some people have a great emotional attachment to their house, as is the home in which they raised a family. As Bankruptcy lawyers, we are frequently asked by clients or potential clients when they can expect to be able to buy a house after Bankruptcy. Often, it is their house debt that led to the Bankruptcy filing in the first place. The goal of buying a house is almost always a good goal to have, but often I will ask “what is the rush?” Why go through a Bankruptcy to get out of debt, and then try to rush to get back into debt? Although many lawyers advise (often as a sales pitch) that the clients can buy a house in only a couple of years after Bankruptcy, is that the best course of action?
Buying a house can be a very good long term investment when 1) you have saved enough money for a meaningful down payment (10-20%), 2) your credit score qualifies you for good interest rates, 3) you have maintained steady employment and income and expect to do so in the future, 4) you plan on staying in the house at least 5 years, 5) you have an emergency fund for unexpected expenses, and 5) payments for the home loan and ALL home expenses are not a significant burden on your monthly budget. Many people just out of Bankruptcy will not be in this situation for a few years. If they do not have a significant down payment and good credit score, they likely will pay a higher interest rate and even normal fluctuations in the real estate market will put them under water. No emergency fund and high monthly house payments means they have to use credit to pay for emergency expenses or repairs, or normal living expenses. All of a sudden, the “investment” has suddenly put them on the brink of Bankruptcy … again.
The answer to the problem is to rent an apartment or house until you can comfortably consider buying a home. You are not risking your financial future by getting into debt. The landlord generally has the obligation to maintain the home and take care of expensive repairs. You need renters insurance, but you don’t have to pay owners insurance and property taxes. In most places, you can rent a house or apartment for less than what you would pay each month to buy a comparable home. You should be able to save money during this time for a down payment and emergency fund (and if you can’t, it is another reason to not buy), as your credit score rises. What about Zillow saying that my monthly payment will be much less than monthly rent? Sure, the marketing pitches say that but they are based on significant down payments and the best credit scores and interest rates. They do not include taxes, insurance, maintenance, pest control, emergency repairs, and so on, that are often several thousand dollars a year. The tax break is also eaten up by these additional expenses.
If you cannot comfortably afford a down payment and the monthly loan payments and expenses for a house, renting is the answer.