Much like any large purchase, home buying can result in emotional spending. Unfortunately, unlike overspending on an appliance or fashion accessory, the implications of taking out a mortgage bigger than you can handle can be a financial death toll.
The excitement of home ownership can get in the way of savvy financial decisions. Keep the following lessons in mind and do not be caught unaware or easily swayed.
1. Shop With Your Wallet, Not Your Eyes
Similar to the adage, “Don’t spread yourself too thin,” when shopping for a new home, it is imperative that home buyers seriously look at how much mortgage is feasible and sustainable for the lifetime of the loan.
Mint contributor Matthew Amster-Burton commented, “Don’t bite off more mortgage than you can chew.”
Amster-Burton explained, “The classic lending guideline says your principal, interest, property tax, and insurance (PITI) should amount to no more than 28 percent of your gross income. Obviously, that’s an arbitrary number. Your financial world won’t explode if you stretch to 29 percent or 33 percent.”
He cautioned, however, “But an outsized mortgage payment is going to bite you sooner or later […] lenders aren’t cuddly and understanding.”
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Similarly, do not fall for “staging” tactics, where the home is dolled up through landscaping, special lighting and designer-esque furnishings. Make sure to look beyond the pretty accessories and look at the foundation of the home, from floor to rafter and everything in between.
2. Maintain That Emergency Fund
Keep in mind that emergency funds are for emergencies, not planned expenses such as purchasing a house. If you cannot afford to pay the down payment without dipping into your designated emergency savings, consider holding off on purchasing for a little longer and build up a savings buffer specifically for the goal of home ownership.
3. No Pre-Approval, Or Confusing It With Pre-Qualification
While pre-approval and pre-qualification may sound like synonyms, they are not the same thing. Pre-qualification is completed before pre-approval, which is completed before a mortgage is approved and enacted.
The pre-qualification is merely an estimate provided by a lender based on basic financial information, whereas a pre-approval outlines exactly how much the lender will be willing to loan.
Both steps are crucial. Without pre-approval, homebuyers run the risk of overshooting their estimates and looking at homes far above what they can afford.
4. Know When To Haggle And What Can Be Haggled
The real estate market is full of strategy and psychology. It is important to understand that the home-buying process is a back and forth exchange of bids and counter-bids. The selling cost is rarely the actual cost of the house; don’t be afraid to get an outside appraisal on the home.
Additionally, some of the “hidden” fees in purchasing – such as real estate agent fees, termite inspection fees, appraisals, survey fees and solicitor fees – can be discussed and haggled between buyers and sellers. Negotiating is part of the process as well. Understand above all that understanding and communication is the easiest way for all parties to leave happy.
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5. Come To The Table With 20
While sellers and buyers often haggle over the amount to put down, Amster-Burton suggests to come to the table and deliver 20 percent. Not only does the 20 percent rule place you on solid footing for paying down your mortgage in a timely manner, it ensures a safe mortgage. Felix Salmon, Reuters, warns of the circulating rumor that safe mortgages can be attained with low down payments, “The fact is that you can’t [have both].”
In illustrating his point, Salmon published a chart that demonstrates the impact of higher down payments on loan defaulting.
Above all else, understand that home ownership is a financial decision that not only has a long-lasting effect on your monetary health, but it has the ability to make or break that stability. Understand the gravity of the situation before jumping into the buyers’ pool. Do your research and make sure you are financially secure before making such a substantial and important purchase.