For a majority of people, buying your first home is financially daunting. Beyond the paperwork and negotiating, there’s that big mortgage looming. Taking on such a substantial financial responsibility is enough to leave you wondering if you can even afford it. And if you’ve figured out that you can, there’s still the question of just how much house you can afford. The question inevitably looms: Even though it’s your first piece of property, should you extend your budget and reach for something a little bigger, shinier, and newer?
It’s certainly not a case in which you want to throw caution to the wind. First and foremost, you have to set a realistic price range.
“The most important factor in your success as a first-time home buyer is to live within a budget,” says Michele Lerner, author of “Homebuying: Tough Times, First Time, Any Time.” “It’s crucial to look realistically at your assets and your current and future income to evaluate what you can comfortably afford.”
Take it to the limit
There are some cases in which pushing your budget a bit could be a good idea. If you’re absolutely certain your income will rise—for example, if you’re about to finish medical school and know your salary as a doctor will be substantial in coming years—you might be a little safer stretching to your maximum purchase price.
If you do decide to go big from the get-go, keep in mind the costs you’ll incur beyond your mortgage payment. Lerner says you should include space in your budget for home repairs and maintenance (about 1% to 2% of the cost of the home you purchase), and you should have emergency savings for three to six months.
“It’s tempting to spend down to your last dollar to get the home you want, but that’s a risky proposition,” she says. “Owning a home can bring some unexpected surprises that renting doesn’t, such as a plumbing bill or a leaky roof.”
“I always try to get first-time buyers into manageable homes for them,” says Sean Keene of the Keene Group in Oregon. “It is no fun being house poor.“
Buy now or buy later?
If you determine that your needs won’t be met in a less-expensive home, or you’ll grow out of it quickly, you might want to wait until your income increases or you have more funds for a down payment.
Typically, it’s best to stay in a home for five to seven years in order to recoup your investment and build equity, Lerner says. That means looking ahead to see if the house you’re buying now is a good fit down the road.
In some markets, however, it makes sense to get into a hot market even if the house isn’t quite right, says Kathryn Bishop, a Realtor® in Studio City, CA.
“Buy the smaller house and get into the real estate market,” says Bishop. “Even if you don’t remodel it, it can appreciate in value faster and higher than interest from your bank.”
How to up your buying power for your first home
There are several down payment assistance programs for first-time home buyers.
If you’re considering buying a smaller home and remodeling it to meet your needs, Lerner suggests talking to your lender about financing your purchase and renovations with one loan. Home improvement loans may include the FHA 203(k) loan program and Fannie Mae’s HomeStyle loan program.
It can be tempting to extend your budget to get the house of your dreams but don’t get into a nightmare situation by stretching it too far.
Article courtesy of realtor.com