September 25th, 2010 3:06 PM by Lehel S.
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 HomePersonal finance writer Liz Pulliam Weston describes four economic changes that should discourage buyers from overspending on their house payment:
IN PICTURES: 7 Smart Steps Every New Homeowner Should Take
Calculating Your Housing BudgetLenders 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 LineWhile 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. (For pitfalls to avoid, check out the 10 Worst First-Time Homebuyer Mistakes.)
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Original story - Why Your First Home Shouldn't Be Your Dream Home
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