Home ownership is part of the American Dream. What most people don’t dream about however, is owning a home and that having it foreclosed upon years later because the house payment was unaffordable. Buying a home you can TRULY afford is an important aspect of homeownership. Otherwise, your dreams of having a place to call home, could literally lead to heartbreak.
Decades ago, it was customary for first time homebuyers to find starter homes. These starter homes were normally fair in size, often in need of some do it yourself work or projects, and price moderate to low. The idea was to own a first home that would provide home ownership – build equity over the following years and THEN as you got older and more financially secure, update and upgrade to a nicer home. Twenty years ago, most people did not start out with grandiose home in an upscale subdivision. Today, many young couples and young people are looking for homes that are packed full of amenities. Each of these amenities adds hundreds of dollars to the house payment, making it even more difficult to maintain for any length of time.
According to CNN Money Magazine, for a person earning around $50,000 per year an affordable home cost is roughly no more than $80,100. This amount was calculated using a CNN money tool which is aimed to help people figure out how much house they can afford, based on income, debt as well as average utility costs, insurance and taxes. According to personnel from the home loan department at Bank of America, the easiest way to assess how much of a home you can actually afford is to do a debt to income ratio. And still, your total savings must also be taken into account – especially in a job market that is unstable and volatile.
New homebuyers also need to be realistic when it comes to the amenities that they desire in a home. You may want a pool, 3 bathrooms, and a 3-car garage – and you may want to keep up with the metaphorical Jones’, yet the reality is that your income to debt ratio compromises your ability to afford these things. People need to be realistic and able to compromise some of the things that they want in their ‘perfect home,’ for ownership as a whole. Taking on too much and wanting too much when you are buying a home is truly a recipe for financial disaster.
This means assessing your NEEDS versus WANTS. Even if you are planning on a family in the years to come, the reality is that a newborn and a 2 year old don’t take up much space in the home. In other words, you don’t need a 5-bedroom house and toddlers don’t need to have a walk in bathroom or closet of their own. Sure, these things would be nice and convenient – but if you cannot afford them, it isn’t worth adding to your list.
According to Forbes Magazine, people interested in purchasing a home should take the following steps in order to make sure they are purchasing a home they can afford.
- The first is be ready with a down payment. You need to save up some money ahead of time so that you can plan to put down at least around 20% of the home value on the loan. This lowers your payments and ensures that you have some instant equity in the home.
- Make sure you spend some time shaping up your credit and paying down debt BEFORE purchasing a home. This will enable you to afford ‘more house’ and ensure that your mortgage interest rates are reduced.
- Do your research when it comes to your mortgage. Don’t go with the first mortgage that you are offered. If you cannot get a good mortgage loan and interest rate, then you should wait a few years before purchasing. Shop around and look into as many options as possible. Remember if something seems too good to be true, it probably is when it relates to home buying.
- Know what you can afford and don’t look at homes that cost more. Don’t tempt yourself and don’t allow an agent to tempt you to look at a home that is beyond your means. Keep in mind that many people are given home loans that equate to mortgage payments they cannot afford. Since the banks hold the liens to the homes, they know that they will get their money and property back should you default.
- House hunt. Consider different areas and locales as well as different cities. Make sure that you know ALL of your options before settling on any one home.
Wanting too much too soon is one of the reasons that the housing market today is in the shape that it is in. Nearly half of all homes in the United States are on the brink of foreclosure, or are being foreclosed upon. Many people who have lost jobs, or who have taken on additional loans for school or automobiles are being faced with the realization that owning a home costs them money. You don’t just pay a mortgage every month and have everything fixed for free when you own a home. You need to purchase a home you can truly afford and one that leaves you wiggle room should you have a crisis – financial or otherwise. One day, you will be able to own a home that has everything you want. But when it comes to home buying, baby steps are the way to go!