How much house can you afford now?
September 15, 2009 · Tagged with Loans
Others maintain that lenders’ tighter standards represent a return to more traditional ideas about home buying that bypass the boom-time assumption that incomes and real estate values rise without bound. Once again, lenders are requiring a down payment, documentation of income and assets, and good credit scores, says Keith Gumbinger, the vice president of HSH.com, a mortgage market analysis firm based in Pompton Plains, N.J.
“The world is very largely a fixed-rate world,” Gumbinger says, but in an uncertain economy, with some economists predicting that unemployment could go as high as 25%, the certainty of a fixed monthly payment is a good idea anyway.
Online calculators will offer you a ballpark figure of how much house you can buy based on your income and other debts. However, buyers should use that estimate as a starting point for a careful examination of their budget and overall financial goals, particularly in today’s economy.
“For a person that likes to spend, if you give them a rule of thumb, they will always take it to the max,” says David Hefty, a certified financial planner and chief executive at Cornerstone Wealth Management in Auburn, Ind. He recommends going through a quantitative assessment of your real expenses and a qualitative assessment of your priorities to come up with a number that represents the house you can really afford.
Even in a market where low housing prices mean you can get a bigger house for your buck, “sticking to that number is key, so you can get a bigger house, but you’re not overextending yourself financially,” Hefty says.
Don’t just take a lender’s word for it when they tell you how much of a monthly payment you can afford. If you’re now renting, use your rent as a starting point and be wary of lenders that assume you can suddenly start paying much more in housing costs, says Liz Freeman, a mortgage expert for ShopRate.com, and a former loan officer.
Consider questions like, “Am I starting a family? Would I like to take a trip around the world? Do I spend my weekends jumping horses?” Freeman says. Make sure the house you’re planning to buy fits in with your overall financial plan.
Real estate isn’t a get-rich-quick scheme, but that doesn’t mean that buying a home can’t be a good investment for those willing to look at it in the long term. “You’ll be building equity slowly and over time,” Gumbinger says, “just like your parents did.”