Why Your First Home Shouldn’t Be Your Dream Home

Michele Lerner, provided by

Friday, September 10, 2010


Since 2000, homeownership rates in the U.S. have hovered around 66% to 67% of the population. In 1900, less than half of Americans owned their own home. The biggest surge in home buying came after World War II, when many young families were encouraged to buy a “starter home”. (To learn more, see Top Tips For First-Time Home Buyers.)IN PICTURES: Financing For First-Time Homebuyers

Attitudes about how to buy a home have fluctuated as much as interest rates during the decades since World War II, and eventually many first-time homebuyers were encouraged to “buy big”, in order to stretch their budgets as much as possible, and buy the home they wanted to live in forever. Given the high level of foreclosures and the loss of value in many homes, today’s buyers are more wary of taking on a home they cannot afford, but many are still tempted to make their first home purchase their dream home rather than their starter home.

A recent Coldwell Banker Real Estate Brokerage survey of their brokers revealed that while affordability was the number one concern of first-time homebuyers, 81% of those buyers consider move-in conditions very important when moving into a home. Only 7% were considering buying a fixer-upper.

Jim Gillespie, president and CEO of Coldwell Banker was quoted as part of the survey, saying, “In the past, first-time homebuyers were willing to purchase older, more basic houses in an effort to save money and break into homeownership. It is important for first-time homebuyers to remember that by considering a fixer-upper for their first home purchase, they can build equity over time and later move up and into their second-stage home that better reflects their expectations.” (Read more, in 4 Types Of Home Renovation: Which Ones Boost Value?)

The Economy and Your Home
Personal finance writer Liz Pulliam Weston describes four economic changes that should discourage buyers from overspending on their house payment:

  1. Inflation
    Rising prices, while hard on the household budget, usually came along with substantial annual raises. These days, homebuyers cannot count on a significant raise to make their housing payments easier to handle.
  2. Two-Income Couples
    Weston says that when more families had a single wage earner, the other spouse could go to work to pay for the house if they were in financial trouble. Today, most households have two workers and that double-income is needed to make the mortgage payment. Consider trying to base your budget on one income or perhaps one and one-half an income to make sure your housing payment will still be affordable if one spouse stops working.
  3. Lenders
    Thirty years ago, it was very difficult to qualify for a loan for more than was easily affordable, but as lending practices changed, mortgages qualifications became looser. Standards have tightened today, but lenders will always give borrowers the maximum amount they qualify for – not necessarily what they should spend.
  4. Retirement
    Thirty years ago and more, most people had their retirement covered by a pension and could count on Social Security. Today, retirement savings are more typically individually funded in 401(k)s and IRAs that come directly from your budget.

    Each of these changes suggests that today’s homebuyers should be shrinking their housing budget rather than expanding it, making sure that they can comfortably keep up with their payments, pay down their principal and build equity in their property.

IN PICTURES: 7 Smart Steps Every New Homeowner Should Take

Calculating Your Housing Budget
Lenders will qualify you for a loan based on your credit score, your debt-to-income ratio, income and assets and your employment history. But each potential buyer should do their own calculation to determine their comfort level with a budget. While lenders these days generally prefer to limit housing expenses (principal, interest, taxes and homeowners insurance) to 28% of the borrowers’ monthly gross income, each individual should think about their own spending habits.

A lot depends on your other debts and anticipated income and expenses. Most lenders prefer to keep total debt to income (including all the minimum payments on revolving debt or other loans such as auto or student loans) to less than 36% of your gross income; although under some circumstances this can rise to 40% or even 45%. (To learn more, see Too Much Debt For A Mortgage?)

Make sure to budget about 1% to 3% of the home value for future repairs and maintenance, since those costs can quickly derail your budget.

Most homeowners should plan to stay in their home for five to seven years, so consider what may change in those years. If you plan to have children and may want to have one parent work less, your income could drop. If you enjoy golf or travel or skiing, you need to factor that into your budget or decide if you are willing to reduce your spending in that area. If you work on commission or overtime or as a freelancer, make sure you base your budget on a low-end year rather than a high-earning year in case your income drops. On the other hand, you can consider increasing your housing spending if your retirement is fully funded, you are debt-free and you anticipate a guaranteed increase in income.

The Bottom Line
While no one can predict with accuracy whether or by how much home values will increase in future years, purchasing a home you can afford and building equity by paying down the principal are the surest ways to get started climbing the property ladder.

Advertisements

About Ron Jesser Realtor

I'm All About Real Estate And I Know The Desert! After 14 years of selling, I better!   When selecting a Realtor or real estate agent, a thorough knowledge of the community, strong negotiation skills, and a commitment to excellent service are all skills you’ll want on your side of the table. Experience counts!

 With great experience as a Palm Springs Realtor and extensive knowledge as a Realtor servicing Rancho Mirage, Cathedral City, Palm Desert, La Quinta, and Indio, I help both buyers and sellers meet their real estate objectives. I will work tirelessly on your behalf by being available to you when you need me to answer questions, provide information or ensure our deal is progressing smoothly; by having a solid team ready to take care of any need or request that comes our way and by providing any resource necessary to make your transaction trouble free. Sellers—I am committed to selling your home or property in a timely fashion and at the highest possible price. If you are interested in receiving a free home valuation, I encourage you to fill out my free Home Valuation Form or check out my Dream Home Finder at www.RonJesser.com Buyers—I will work with you to find your ideal home at your ideal price. Let’s narrow down what you are looking for, so we can begin the home showing process and get you a closer look at what these communities have to offer. No matter what it takes, your next home buying or home selling experience will be an enjoyable and successful one because I will be doing the work for you. And by working tirelessly on your behalf, as a team we will make your next home buying or home selling experience an enjoyable and successful one. 
 Remember—I'm not here just to find you a home. I'm here to help you find a life you will love! Thank you for considering me as your Realtor. Please call or email me if you have any real estate questions about Greater Palm Springs. DRE# 01280106
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s