There’s a house that you pass every day on the way to work. It’s had a for sale sign in the yard for a few months and you think you can get a good deal on it. It’s your dream home and you’ve noticed that even on cloudy days, a sort of heavenly light shines down on it as if the home was designed and built just for you.
So far, you haven’t given in to the voice telling you to call the realtor listed on the sign but you’re having trouble resisting. You know that once you do, the next step will be to figure out how you can afford this house.
In America, it seems like we’re born with something in our DNA that makes us overspend. We tend to purchase more than we should and that’s no exception when it comes to a house. Don’t fall in to the urge this time. That dream house may be within your reach but how do you know for sure?
Don’t Listen to the Bank
Even though lending standards are much tighter than they were just a few years ago, your bank or mortgage lender still isn’t your source of financial morality. Just because they say you can afford it, doesn’t mean you can. The rule of thumb is that your mortgage should never be more than 25% of your monthly take home pay.
The Down Payment
Prior to 2008, moving in to a new home with little or no money down was a possibility. Today, lenders require down payments of 20% or more. If you can’t afford it, don’t stretch your finances to make it work. Moving in to a new home comes with a lot of unforeseen expenses. If you can’t afford it now, save up.
Can You Sell Your Current Home?
You want to exchange your current not-so-exciting home for a piece of residential utopia but homes don’t sell as fast or for as much as they used to. You need a buyer for your current home before you start paying on a new home since it’s not uncommon for homes to stay on the market for six months or more. Can you afford six months of two house payments?
How’s Your Credit?
If your credit isn’t spotless, you aren’t getting a loan. That’s the new normal in the lending market now. If you have some missed payments or other credit problems, the decision will most likely be made for you. If you believe you have excellent credit, pull copies of your credit reports, examine them closely, and clear up any problems before applying for the loan.
Don’t think of your dream home as a place you’ll live forever. That’s probably not true. Before you become a buyer, think as a seller. Do you see the neighborhood as “charming” where others may see it as “shady?” Is the old world charm of the detached one car garage going to be a selling liability later?
It’s true that homes are cheap right now but can you really afford it? We live in a real estate world that is much more challenging than the pre 2008 years where buying and selling a home was easy. Until the housing market rebounds, it’s often best to stay in your current home. There will be amazing real estate opportunities for many more years.