Three mistakes to avoid when buying a home
Every spring in Iowa, it seems we wake up from winter. The world has been monochromatic for months. Everything is white and gray, dark and drab. One day, a switch flips and we’ve changed the channel to a colorful new season with spring’s green grass, blue skies and vibrant blooms.
It’s a time for new beginnings, and that can include a new home. Spring is traditionally the most popular time for housing activity. The Des Moines Area Association of Realtors reports home sales were on the rise in April, with 1,212 homes sold. Many more are currently on the market with new construction and “For Sale” signs going up in front yards every day. So whether you’re buying for the first time or upgrading, there are a few things to keep in mind as you begin the process.
1. Don’t overbuy. Know what you can afford.
Purchasing a home seems like a natural progression at many stages of life. Young professionals start out in a new city, with a new job and new friends. Apartment living is perfect for the first few years, but once established in a career, it may be time to make the leap to home ownership. Growing families may be craving more space or want to move to a different school district, so they may be looking to upgrade.
A key part of the process is knowing how much you can spend. Compass advisor Michele Bjorkgren said, “One of the most common mistakes is that people overbuy, and that really can cause problems.” A good rule of thumb is that your mortgage should take up no more than 28% of your monthly income.
Forbes Magazine has an easy formula: Multiply your monthly income by 28, then divide that by 100. The answer is 28% of your monthly income. Say you earn $6,000 per month; 28% of that monthly income comes out to $1,680. That is the maximum amount you should spend on a mortgage per month.
The next step is to look at one of the online mortgage calculators to determine what price range you should be looking at. The calculators can also factor in costs like homeowner’s insurance and property taxes. These costs need to be added in when determining how much you can spend on a mortgage per month.
The amount of your down payment can also have a big impact on your monthly mortgage. Bjorkgren has this advice for her clients. “If someone is looking at buying a house, I look at ways to help them save a good down payment, at least 20% down. Put down as much as you can to keep your monthly payment as low as possible,” she said.
For most buyers, the down payment comes from savings and the equity they may have built in their current home. First-time homebuyers may find it difficult to come up with that 20%. Some borrowers can qualify for a mortgage with a down payment as low as 3%. Other options include a government-backed FHA loan, VA loan, lender-paid and discounted mortgage insurance. Talk with your lender about the possibilities available to you.
2. Don’t forget your other debts and expenses.
If you have monthly debt payments of credit card bills, student loans or car payments, that will affect how much you can borrow. Interest.com says homebuyers have been well-served by what’s called the 28/36 rule. Monthly housing costs should not exceed 28%. Monthly debt payments shouldn’t exceed 36% of your gross income. Let’s say you earn $60,000 a year. Your monthly housing limit would be $1,225 per month. And your monthly debt limit would be $575 per month.
It’s important to note that you may find lenders are willing to loan you more money than you can comfortably spend. According to the Mortgage Reform and Anti-Predatory Lending Act, any entity lending money for a mortgage cannot underwrite the loan unless they determine you can reasonably pay for it. Lenders cannot approve mortgages that would take up more than 35% of your monthly income.
Other monthly bills could also affect the amount you’re willing to spend. Do you have child care expenses? Do you send your child to a private school? Do you have a gym membership? Do you dine out a lot? Do you travel? Do you enjoy spending money on clothes and shoes? Buying a home may mean you have to compromise or cut back on some of these lifestyle expenses.
3. Don’t fail to plan ahead.
You don’t have to hit the maximum payment you qualify for. Be careful to give yourself some breathing room. Make sure you have money for unplanned expenses, such as a broken water heater, new roof or even a job loss. It’s important to have an emergency fund of three to six months of expenses because the unexpected can and will happen. Radio host and author Dave Ramsey said, “A crisis becomes an inconvenience when you have an emergency fund.”
There will also be expenses with your move; window coverings, a fence, landscaping, rugs, or new furniture. You may want to pay for some of these expenses upfront, but others can be budgeted and saved for in the months to come. Come up with a list of possible expenses so you know what you’re getting into before you sign the loan.
It can be incredibly exciting and exhausting to go through the home buying process. Having an accurate idea of what you can reasonably afford can remove some of the worry, both when you sign on the line and during the months of payments to follow.