The subprime mortgage bust has scared a lot of people away from the housing market. The nightly news is filled with images and stories of everyday Americans who are losing their homes because they made greedy and uninformed decisions, they were taken advantage of by predatory brokers, or a combination of these situations. However, the news isn’t all bad. This decline in the market has dropped prices and made housing affordable to many fiscally responsible renters who never considered home ownership to be an option.
If you find yourself house-hunting, make sure that you follow these five simple steps to take advantage of this downturn in the market; if you don’t, you could be the next sad story on your local news.
1. Accounting for Extraneous Expenses
As with almost any major purchase, there can be a number of fees associated with buying a home. Costs associated with property taxes, homeowner’s insurance, standard maintenance, and utilities should not be overlooked. In addition, if you buy a home that is part of a complex or attached to a homeowner’s association, you will have to pay annual fees as well. Make sure that you take these additional expenses into account when you are determining how much home you can afford.
2. Acknowledging Special Assessments
Many homes require a number of regularly scheduled special assessments to be performed in order to satisfy local regulations and ordinances. These are fees that are required in addition to standard property taxes. In order to make sure that these costs don’t take you by surprise, obtain copies of prior bills for these services and inquire about any pending and future assessments that need to be done on the property.
3. Finding a Manageable Mortgage
A good question to ask yourself before contacting your local banker to discuss a loan is, ‘how much is too much?’ While you might be tempted to try and get as much money as possible if you can find a good rate, you do not want to make the mistake of taking on a loan so big that your finances will be stretched to the point that you cannot make your payments. Traditional income multipliers are a good place to start. If you have a single income, 3.5 times your annual salary is the maximum that you should consider requesting and if you have dual incomes, the maximum should be about 2.75 times your joint salary. If these amounts will stretch your budget too far, then it is a good idea to consider borrowing less.
4. Determining How Much Home to Buy
Now that you have a handle on all of the costs involved and have determined how much money you can borrow, it is time to figure out just what you can afford to spend on a new home. Whatever you do, don’t bite off more than you can chew; doing so could quickly lead down the road to foreclosure. Take into account your credit history, the closing costs on the loan, the amount of the down payment, and any preexisting debts. Weigh these against your income and savings before making a move.
5. Welcoming Your New Home into Your Basic Budget
Once you have everything in order, set a budget and stick to it. While your new home purchase will undoubtedly become both your biggest asset and your biggest expense, you still have to eat. It is also important to make sure that you start building a rainy day fund in case of emergencies; one of the things that accompany a new home is the potential for substantial unforeseen expenses. Set a reasonable budget that includes an allowance for unexpected costs and you can live happily ever after in your new home.