The journey toward home ownership can be long, and for many of us it’s one that includes many forks in the road along the way. Unfortunately for excited first time buyers, the actual home search itself is just a part of the process, and it’s usually preceded by several very important steps. Getting your credit in order, finding the right housing market, and shopping around for a mortgage are just a sampling of the big ticket list that need to be checked off. And it’s imperative to avoid falling into some all too common pitfalls that plague first time buyers along the way. Sometimes it’s as simple as buying more house than you need; even if you can afford it.
You probably already know that attempting to live above your means is a quick ticket to troubled waters, but you might not know just how easy it is to fall into that trap. Few people purchase homes or make investments that they believe they truly can’t afford. In fact, in the aftermath of the recession and a housing crisis that’s still very much affecting markets everywhere, it’s actually illegal for lending agencies to provide predatory loans. Agencies are required to only approve loans that a family or individual can “reasonably afford.” That problem is defining what’s reasonable.
Consider this: you could be approved for a loan that’s for more than you were expecting, and you might not even need to put much, if any, money down on a new dream home. On paper, you might decide that you can hack the monthly mortgage payments, but after closing costs, interest rates, home maintenance, bills, and pre-purchase debt, it’d be easy for anyone to find themselves struggling. Suddenly, those payments seem much higher, and keeping all the balls in the air becomes much more difficult. In the event of an unforeseen emergency expenditure, or if the value of the home depreciated against the mortgage, sliding deeper and deeper into debt can become unavoidable.
One of the best ways to prevent this from happening is to purchase a home that’s well within your means. There are many online tools available, like this handy calculator provided by Trulia. There are also general rules of thumb like not exceeding 33% of your monthly income on housing expenses. But when it comes to finding out if you’re purchasing too much home for your needs, you have to take a much more personal approach.
The problem with mortgage calculators and general guidelines is that they don’t take into account your individual, extenuating circumstances. If your housing costs are 33%, but you have tens of thousands of student loans to worry about, it still might not be a good investment. Additionally, what makes sense for one family probably won’t for another. A couple with two children could have the same income as a single professional, but if they’re both interested in the same two bedroom home, the couple will clearly have higher monthly expenses.
The only way to ensure that you’re not purchasing too much home for your needs is to create a painstakingly detailed budget that covers every aspect of your life along with total debt, estimated monthly mortgage payments, and all expenditures including food, commuting, and contributes to savings accounts for causes ranging from retirement to college funds. After that, only accept a home loan that suits your specific circumstance.
Lifestyle choices are another important factor to consider that can’t be reflected with an online calculator. When most people save to purchase a home, it involves some degree of belt tightening. But for some families it’s more logical to tighten later rather than sooner. For one family, making compromises early before the purchase by doing things like working on the side, selling a car, or even moving to a smaller apartment are called for if it means getting to place a larger down payment, enjoying a less expensive monthly mortgage, and being able to save for college while their kids are in high school.
Another family might be more willing to take the hit of a higher mortgage if allows the kids to have their own bedroom, but they won’t be able to eat out as much or take those regular trips to Disney World. In that situation, it’s not that the family is getting too much house, it’s that the house that they need necessitates a downgrade in lifestyle. That’s nothing wrong with that way of thinking if the family is truly prepared for it.
All in all, what’s “affordable” and what’s “comfortable” is subjective for each and every person. It’s your future in play! When it comes to home loans, it’s up to you to decide what’s reasonable. Don’t let lenders do it for you.