The housing market continues to suffer from the consequences of our financial excesses over the last decade. With the general economy still in slow growth mode, and high levels of “shadow” inventory — foreclosed homes owned by banks, but not yet on the market — many economists expect further downward pressure on prices for a few more years.
If you don’t yet own a home, and your situation is flexible, you may benefit by being patient and staying up to date with what’s going on in your local real estate market. Proverbs 27:23 conveys great wisdom when it says, “Take good care of your flocks, give careful attention to your herd.” With that said, if buying a home now is right for your situation, here are some tips that will help you make a good decision for the long term.
Buy what you can afford
One of the most common mistakes people make when purchasing a home is buying more than they can afford. It’s an exciting time, and it’s easy to get caught up in that excitement. People often depend on their lender to tell them what they can afford. Remember, lenders make money by loaning money. The system largely rewards them for the volume of lending they do rather than focusing on what’s good for you. Rather than letting the lender tell you how much house you can buy, you’ll be far better off telling the lender how much you can afford.
How can you know what you can afford? Update your existing budget and create a financial forecast that includes the estimated costs of homeownership. I find it works well when all housing-related expenses — including payment, property taxes, insurance, maintenance, utilities, landscaping and improvements — are 30-35 percent of gross income. When you spend beyond this, it will be difficult to fund other important areas, including saving, education and insurance.
Financing the purchase
When my parents’ generation was getting a mortgage, things were pretty simple. They’d make a 20 percent down payment and get a loan for the remaining 80 percent with a fixed payment that lasted 30 years. There weren’t any surprises.
In an effort to make housing more affordable, “creative” loans were developed that reduced the amount of money buyers needed. Down payments were reduced, sometimes to zero. Monthly payments were reduced so that only the interest on the loan (if that) had to be paid in the short run — kicking the obligation to pay the principal down the road.
While this “easy credit” can feel good for a while, eventually the bill has to be paid — as we have learned. Creative financing waxes and wanes with economic cycles. While it has waned since the bursting of the bubble, such loans are still available, and they can be tempting to use. I encourage you to stick with a basic loan (fixed rate and straight-line amortization) that sets you up to succeed in the long term. You might even consider prepaying your mortgage so you can own your home by the time your oldest child enters college.
One further note on down payments. Because a housing purchase is a long-term commitment, I recommend buyers have enough in savings to make a 20 percent down payment. It would be my preference that lenders required such a down payment, but until they do, we can expect the current price volatility to remain.
Therefore, rather than risk losing your down payment to a further 15-20 percent price decline, it may be prudent to make the minimum required down payment and set aside the remainder of your funds (to make up the full 20 percent) in your rainy-day fund. God love you.
Phil Lenahan is the president of Veritas Financial Ministries (VeritasFinancialMinistries.com) and the author of “7 Steps to Becoming Financially Free” (OSV, $19.95). Submit questions for columns to email@example.com.