Many first-time homebuyers believe they are almost ready to begin looking for a house. Incomes are strong, debt is paid down, but when they meet up with a financial advisor, they often realize that they have more work to do on their finances if they want to buy in their desired price range or neighborhood.
Using mortgage calculators from real estate websites can only get you so far. Affordability is comprised of a lot of things that are not included in the FICO score and your actual credit score will determine your payment. Buyers are coming to the market these days to find the best deals, when in actuality, by cleaning up their credit and getting a lower interest rate, they could save hundreds each month in mortgage, paying far less for the home over the life of the mortgage than the measly $10,000 they save by knocking the price down. It can come as a shock to see the payment difference in a mortgage calculated at 4% and one at 5.25%, a rate that was totally reasonable a few years ago.
Other factors can also effect how much mortgage you can afford. Day care is a significant cost for young families, but the mortgage lender doesn’t include it in the spread sheet. If you know that a hidden payment of $1,200 per month is not included in your debt to income ratio, it is really important that you tell your broker about it, so that your ratios are not based on inaccurate information. A huge factor in the bursting of the housing bubble was the knowledge by the buyer, that even though the payment wasn’t really affordable right now, with the rise of home values, they could refinance and make it more affordable in a few years. Buyers sometimes got into homes they couldn’t comfortably afford homes and when the homes lost value, buyers lost their homes.
The Homework:
First, know how your credit is going to affect your mortgage payment and if you don’t have good enough credit to get a decent interest rate, wait.
Second, write down everything that you have to pay for, or will have to pay for in the next several years and think worst case scenario. Income taxes, day-care, college tuition, braces. Pad your budget with these items so you don’t think too “pie-in-the-sky” about the home you can afford.
Third, make sure you have a back-up plan if something doesn’t go as planned. Can one partner make the mortgage, if one of you loses a job? Is the property rentable if you have to move to a new city for work? If the answer is no, it might be best to wait.
Home ownership is a great wealth builder for American families, but it can be a stress inducing nightmare if it becomes unaffordable. Realistic planning is the best way to avoid those pitfalls.
I work throughout Rhode Island with offices in Newport, Barrington, the East Side of Providence and East Greenwich. Thanks a lot for stopping by!
