Buying your first house is always a challenge. If you have good credit and an income to justify the mortgage you require there is no reason not to go ahead once you find a piece of real estate that you like. Sounds simple doesn’t it but you are talking about the single biggest financial decision of your life to this date? It needs more than cursory thought before you proceed.
Your current expenditure will be made up of:
- Ordinary daily spending
- Groceries and household expenses
- Utilities, insurance and telephone network
- Existing debts such as personal loans, student loans and credit card commitments
Current Finances
Hopefully you will be running at a surplus that currently goes towards providing for retirement, an emergency fund and possibly a fund to provide for future educational needs for children. It is distinctly possible that you will have been saving towards a deposit for the purchase. That is about to finish. If you are getting married and buying simultaneously it may be the first time you have both left home. Otherwise your mortgage will replace any rent either of you are paying. The sums need to add up.
It is important that you do not fool yourself when you calculate what you can afford. You could be in trouble in the future especially if you have two regular monthly pay checks that may not be the case if children come along.
The Weakness of Percentages
You might define affordability as an estimated monthly mortgage installment as a percentage of the income received but there are flaws:
- That makes no reference to other existing financial commitments. You need to calculate your disposable income once current commitments are subtracted.
- Does that mean from two incomes which may become one at some point in the future?
Affordability
The last thing you want to do is struggle because you have over-reached yourself. There is always the chance of an emergency as well which could further compound the problem. You need to resist the temptation to rely on others when you decide to purchase real estate for the first time. No one can make the ultimate decision on affordability but you yourself. You are the one going to live your life under the constraints you set yourself. Sometimes people rely on installment auto lenders to guide them but all they are actually doing is to tell you what amount they are prepared to loan you, the other costs involved and the interest rate which will be applied. It is for you to decide the suitability of the offer and whether to proceed.
The recession saw a huge number of foreclosures; there have been plenty since then who initially were approved for mortgages on the basis of ‘affordability.’ The problem is that those who grant your mortgage often sell on the risk into a secondary market and make their profit that way. It is therefore still in their interests to approve loans for bad credit that are not obviously toxic. That in itself is a reason why a mortgage lender cannot be regarded as a financial advisor.
It is far better to decide for yourself what you can afford. You can get an idea online about what the likely monthly installments will be in the current market place. You need to then keep that figure in your mind and see if you can get pre-approval for a reputable lender before you go searching for a house. It means you won’t be wasting your time looking at property that is unsuitable for your needs and you will be guaranteed that agents will be responsive to your calls.
If you have a decent deposit to offer you are likely to receive a preferential rate because you are less of a risk to the lender. Building up a deposit is a challenge in itself and it may take you a while to accumulate it. If you have expensive debt such as that on credit card balances then you need to address that, perhaps even by paying it off with a personal loan? When you finally enter the real estate market you have to be in control of your finances. Get into that position and you have an excellent chance of building a significant asset in the years ahead.
About Carson Derrow
