What Not to Do When You Buy a Home

1. Price your passions. Andrews divorced his first wife after 21 years of marriage and was responsible for $4,000 a month in alimony and child-support payments. This left him with $2,777 a month in take-home pay to support his new wife and her children.

A researcher at Ohio State University found that people who stayed married accumulated 93 percent more wealth than single or divorced people. Economist Jay Zagorsky of OSU’s Center for Human Resource Research tracked the financial and marital status of more than 9,000 people from 1985 to 2000. Those who divorced saw their wealth reduced by 77 percent on average.

In the book 'Spend ‘Til the End', authors Lawrence Kotlikoff and Scott Burns urge readers to “price their passions” -- or consider the financial consequences before they have multiple children, move to a big city, or get divorced. Unromantic? Maybe. On the other hand, Andrews writes that financial stress nearly blew apart his second marriage.

2. Budget for the worst-case scenario. After the $2,500 mortgage payment, Andrews had $277 a month left for necessities, and hoped that Patty’s salary would make up the difference: “I was banking on Patty to earn enough money to keep us afloat.” Five months after moving into their home, Andrews was shocked to find just $196 left in his checking account. He writes, “How could I have glossed over the fact that we were spending about $3,000 more than we were earning, month after month?”

Actually, it’s pretty easy to gloss over those kinds of details if you don’t base your budget on your real income and expenses but instead dwell in a parallel universe where your fairy godmother balances your books with a wave of her wand (a big raise! the winning lottery numbers! an email from a Nigerian who will pay you a hefty fee to help him transfer money out of his country!).

For example, I have one budget based on our current household income, and a shadow plan that would apply if our income were cut in half. It eliminates college and retirement savings, an extra principal payment we make on our 30-year mortgage, vacations, and the kids’ extracurricular activities, among other expenses.

Theoretically, we could also sell my husband’s season tickets to the New York Giants games. But I don’t include that in my budget because I would have to chloroform him to get my hands on them, and Accounting 101 says you don’t count your tickets before they hatch. How could Andrews count an entire income before it hatched?

3. Avoid the two-income trap. Counting on a second salary to make ends meet in the first place was an enormous gamble. Andrews writes, “Patty had spent much of the previous two decades as a stay-at-home mother in Los Angeles. Her last full-time job as an editor at a political research company was back in the early 1980s.”

A 2004 study found women who drop out of the workforce for three years or more lose 37 percent of their earning power. Not surprisingly, Patty landed a commission sales job at a department store averaging just $2,400 a month in take-home pay. She subsequently found an editorial position earning $60,000 -- but by that time they were knee-deep in credit card debt. (And while Andrews portrays his family as average Americans, overwhelmed by rising expenses, it turns out his wife Patricia has filed for bankruptcy twice.)

Seven months into their two-income lifestyle, they refinanced into a bigger mortgage to pay off their credit cards. Four months later, after their credit scores rebounded, they refinanced again into a lower-interest loan. The original mortgage payment of $2,500 a month ballooned to $3,200. That same month Patty lost her job.

Married couples with children are 75 percent more likely to declare bankruptcy than childless couples, according to Elizabeth Warren and Amelia Warren Tyagi, authors of 'The Two-Income Trap'. Their research shows outsized housing costs, especially in high-quality school districts such as the one Andrews and his wife chose, are a big factor, along with car payments and health insurance costs. If one earner gets sick or laid off, there’s virtually no safety net.

4. Know what you can afford. A mortgage, property taxes, and insurance should total no more than 29 percent of gross income -- and those expenses, plus other long-term debts, should be no more than 36 percent of gross income. That’s according to the Federal Housing Administration. Andrews’ ownership costs, plus alimony and child support, totaled about two-thirds of his gross income.

Meanwhile, annual maintenance costs average 1 to 2 percent of a home’s value. In a $460,000 home, Andrews should have budgeted at least $4,600 a year for fix-ups. He didn’t. He writes, “Our stately little house looked increasingly trashy: peeling paint and broken screens on the front windows, crumbling concrete on the front stoop, a lawn that was mostly crabgrass.”

5. Call your bank and ask them to cut you off in the event you attempt a debit or ATM transaction and the account has insufficient funds. As Andrews’ finances spiraled out of control, he repeatedly overshot his checking account. “Every time I overdrew my checking account by even a few dollars, the bank would tap my Mastercard for $100, helpfully deposit the cash in my account, and charge me $10 for the privilege,” Andrew writes. He recounts a $5 overdraft for school supplies. Assuming he deposited money two weeks later to repay the overdraft, his annual APR on the $10 overdraft “loan” would be 5,200 percent. (Here’s the calculator.)

6. Have a serious conversation about money with your intended before you tie the knot. Even after Patty got the $60,000 job and they had an opportunity to catch up, Andrews reports spending $2,845 in one month on their credit cards, including $700 for clothing at J. Crew. “Patty spent little on herself, but refused to scrimp on top-quality produce, Starbucks coffee, bottled juices, fresh cheese, and clothing for the children and me,” Andrews writes. “She thought it wasn’t worth agonizing over nickels and dimes.”

Ah, the agony of nickels and dimes. A funny thing happened to me over the past 20 years: I kept saving my nickels and dimes and investing them, and lo and behold, they snowballed into hundreds, then thousands, then tens of thousands of dollars. This happened in part because my husband and I agreed not to offset the nickels and dimes we were saving by financing stuff we couldn’t afford on a credit card. Brie and lattes at 27 percent interest are really pricey.

Talk to your partner about money, and agree to use a budgeting tool to facilitate the conversation. Researcher Zagorsky found that couples argue about money more than any other topic -- in part because they don’t agree on how much they have.

The typical husband says the couple earns 5 percent more income and has 10 percent more total wealth than his wife reports, the study found. Meanwhile, the wife says the family's debts are $500 more than her husband reports. Among older couples surveyed, half differed in their wealth estimates by more than $14,700; among younger couples, half differed by $7,000. (Husbands paid the bills about 40 percent of the time.)

Perhaps the most critical discovery: Couples who didn’t divorce in the 15-year study were more in agreement on their estimates than couples who divorced. In other words, they knew how to communicate about money. If you want to avoid your own personal credit crisis, that's a good place to start.