Financial Guidelines for 1st Time Homebuyers

Dear First Time Homebuyer,

It is a great time to buy a first home. The government is willing to give you a first time homebuyer credit of up to $8000. Interest rates are low, inventory is good in some regions, and sellers are ready to negotiate.  So how do you make a good financial decision that will keep you out of future disaster?

As the one-year anniversary arrives of our near financial collapse, maybe it is time to re-evaluate the "rule" that you should always stretch financially when buying your first home.  Remember, you want to own that first home for a while, rather than finding yourself in financial hot water.

Put 20 percent down, so you have less of a chance of owing more than your home is worth if prices fall again. Get a fixed-rate mortgage, so the biggest part of your monthly housing bill remains stable.

If you want to be conservative, don't spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments. The Fannie Mae and Freddie Mac guidelines will only let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more.

If you take an adjustable-rate loan, remember that the banks may not be concerned with whether you'll be able to afford the maximum possible payment when the interest rate adjusts in five or seven years. So you should be worried about it.  Remember, if you are responsible enough to buy a home, you have to be responsible for looking out for your financial future.

CONSIDER YOUR INCOME The best case for stretching for a first house is that first-time home buyers in their 20s and 30s will probably see their incomes grow more quickly than older people buying their second or third home.

However, this argument is good only as long as you continue to work. But if you're buying your first home before you have children, regardless of gender, you may feel quite differently about work once you become a parent. And if you do, you may a little financial flexibility to stay home for a few months or years.

Don't think you want children? What if you are unemployed? or you need to make a career change because your industry is dying? or you experience a midlife crisis and want to change careers.

Model out your budget, including any proposed mortgage, three ways - with both spouses working full time, one working part time and one staying at home for a few years. Imagine or even practice living on one income, to see if it's truly realistic.  Be realistic with your expenses. Include the expenses that go along with maintaining that dream home.

Now that you are feeling financially responsible, what should you do to make a wise decision?

BUY BEST (OR CHEAPEST)  Michael Kalscheur, a financial planner with Castle Wealth Advisors in Indianapolis, suggests buying the dream house you covet (if you can afford it) OR an inexpensive starter house but not anything in the middle.  "If people have their heart set on something, inevitably, if they can't afford what they really want, they buy the next best thing," he said. "That's absolutely the worst thing you can do. Not only do you not get what you want, but it sucks you dry."

Why? Well, if you buy that starter house instead of the mid-level home, you can save the extra money that would have gone toward paying for the higher mortgage payments on that house you didn't really want anyway.  In a few years, you will be able to buy the house that you really wanted. 

Another great idea - EXTEND THE HOUSE  You don't ever have to move from that first home.  Moving is expensive and the transactional costs are even worse.

Buy the neighborhood rather than the house.  If you can find a starter house in a good neighborhood, or the best neighborhood you can afford, then you can can upgrade the house periodically when your income is stable and your savings or available credit make it possible.

Extending the time that you stay in a home and and the physical boundaries of the home itself may make more sense than stretching for each successive mortgage in a series of two or more houses. 

THE EIGHT-HOUR RULE  - Whatever the size of your mortgage, you have to be able to sleep soundly at night. So if that loan amount has you reaching for the Ambien, it's a pretty good sign that the loan is a bit of a reach too.  Better take a pass.

Final rule - GET A REALTOR THAT YOU TRUST.  My rule with first time homebuyers is that I imagine I have to resell your home in five to seven years because you have moved along in your career or there have been other positive changes in your life.  I would never let you buy a house that I couldn't sell easily again in the future for you.  I will never let you buy a house that doesn't make financial sense for you.  I believe that this is always about your best interests.   

Please give me a call if you want more help with finding a perfect first home.

Sincerely,

Lise Howe

240-401-5577

lise@lisehowe.com