The first time homebuyer needs to be realistic when making choices in real estate transactions. Everyone considering purchasing a home should be pre-qualified by a mortgage professional. This is simply a review of your employment and income as well as your recurring debts. Actually, we at LINCOLN Mortgage run your scenario through the automated underwriting system. When I receive an approval through the system, it is basically an APPROVAL (not pre-approval). This approval is only valid if the income and debts are what they were purported to be when I ran your case through. In other words, as long as your W2's and paystubs prove that the info I put into the system was accurate, and you don't run up any new debt in the meantime, you're good to go, pending appraisal of the subject property.
Along with this approval I will give you a maximum mortgage amount that you qualify up to. Some people hear the housing payment they're qualified for and their first reaction is "I can't afford that payment." Keep in mind that the payment you're qualified for and the payment you're comfortable with may be two different things. This is common with first time buyers. They often come from situations in which they lived with family or paid board or rent, so its quite a shock the first time they hear what their new housing payment may be.
Here's where owning a home pays off. Suppose you're presently paying $1,000 monthly rent. Lets say that your proposed housing payment is $1,500. Your first thought is, "Wow, I can barely make the rent, now this house will cost $500 more." Not so. Due to the fact that your mortgage interest is deductible, the difference is not nearly so great as it seems at first blush, thanks to Uncle Sam.
What's he got to do with it? Well, right now, without any deductions, the IRS is taking roughly 25 cents in taxes of every dollar you make. But for every dollar you put into a housing payment, Uncle Sam lets you keep that 25 cents. Therefore, a $1,500 payment is roughly equivalent to a rent payment of $1,125. So, for a measly extra $125 per month you can own a home, and start building equity, which sure beats renting, in which you pay someone ELSE'S mortgage for them. Now, remember, when you write that check, it'll feel like $1,500, not $1,125. But at tax time you'll see the difference, and the benefits of owning.
Getting back to my first point, as I said, some people are nervous about going up to the maximum that the mortgage company allows. Others immediately want to take it up to the limit, and maybe even try to squeeze a little higher. This is where you must be realistic. Just because your mortgage rep says that you qualify 'up to' a specific payment or mortgage amount, it doesn't mean you've got to go up to that maximum. Home ownership is a huge responsibility and there will be sacrifices in lifestyle that you'll have to make. This is where you have to be honest with yourself and decide just how much you can or are willing to curtail spending. Don't get in too deep. The home for $250,000 is beautiful, with a pool table in the basement and a deck, but, do you really need that home to start out? You may be better off settling for the home for $180,000 which doesn't seem nearly as impressive but will just as well serve your young family's needs. Many buyers, especially younger ones, get caught up in the 'entertainment aspects' of a home. "Think of the great parties we could throw here," you think to yourself.
Keep in mind that your first home only need meet the requirements of your young family. You may be better off buying that 'dream house' years down the road. In the meantime, as long as the beer's cold and you can barbeque a burger, people will still come to your parties. Don't jump into something that leaves you house-poor.
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