If you are a first time home buyer, you have likely heard the warning to not buy too much house. This is a real concern, since often banks are willing to lend you more than you may be comfortable paying back, which can then lead to debt problems down the road. When looking at real estate, the following advice can help you avoid this trap.
Tip #1: Plan for income loss
Most people assume their income is going to go up as they advance in their careers, and this is generally the case. Yet, there will also likely be periods of income loss, such as from illness, unforeseen temporary job loss, or unpaid parental leave. Since you can't see the future, it's a good idea to make sure you can handle the house payment and base expenses in the event of an income loss. For a two income family, this may mean purchasing a home that you can afford on just one person's paycheck. For one income family, you may want to make sure you can handle the payment even if you lose half your income.
Tip #2: Set a comfortable savings rate
Savings is also key to moving forward. Buying too much home means you don't have anything left to save at the end of the month after paying expenses and making your mortgage payment. This puts you one disaster away from possibly losing your home. Before setting a limit on home price, consider what your desired savings rate is. Is it 10% of your income, or do you want a higher, more aggressive rate? Once you know this, then add in your other expenses on top of the savings rate. What is left over is what you can spend on a house.
Tip #3: Be realistic about your needs
Do you really need a home with two master suites for a small family? Does school district matter that much if you don't plan on having children? It's easy to get swept up in the bigger (or newer) is better, or to fall for the idea that certain locations are desirable for all people. Instead, be realistic about house size, location, and amenities so you don't go over budget.
Tip #4: Don't pad the loan
It's common to add a few grand to a loan to cover unforeseen repair expenses, moving costs, or renovation needs. Often this is unnecessary. If you can't afford the moving costs or some minor repairs, you have bought too much house. Renovation expenses should only be added in if you are purchasing a home well below market value and below your budget.
For more help finding the perfect home, contact a real estate agent.