Searching for a home is exciting and nerve-racking all at the same time. Especially since housing inventory is low giving buyers fewer options at higher prices. You can’t control the real estate market, but you can control your budget. The smart home buying strategies you should follow so that you won’t go broke.
“How much can we afford and how much do we want to pay? Those are two different things,” a Kansas City homebuyer named Ryan said.
Ryan and his wife, Katy, are six months into their house hunt. When they see a picture perfect home, but the price isn’t right, they talk about it.
“It’s hard. It really is,” Ryan said of the emotional versus practical needs of his family.
Home buying is an emotional process, but you can’t let your emotions drive your decision. Consider your finances, looking at both long-term and short-term goals.
With a 17-month-old son, Ryan and his wife are laser focused on their budget. Retirement is their long-term goal and vacations are always in the short term plan.
“How old do we want to be when we retire? That also includes our lifestyle in terms of taking trips. What does it look like? What trips do we want to take each year,” Ryan said.
While most homebuyers rush to hire a realtor, you may want to consult your financial advisor first. He can help you manage your wants and needs while keeping your financial goals in focus. Financial advisors often find organization is the biggest financial planning obstacle.
How much house can I afford?
You’ve heard the phrase — house poor. It’s a sad reality for many Americans. They let their emotional wants drive their purchase.
If the recession taught us anything, it’s that your budget needs to be top of mind when searching for a home.
You don’t want to be house poor, unable to afford much else because your housing takes up too much of your budget.
If you ask your mortgage broker or loan officer how much house you can afford, he’ll tell you one thing. Ask your financial advisor, and you’ll get another answer. Finally, ask yourself and your spouse.
Use all three answers to figure out how much house you can afford.
Most financial experts suggest keeping your housing expenses at 28%. This includes HOA fees, taxes, PMI, and home insurance.
Housing costs are just one part of the equation. Consider all your debts too.
Your mortgage, car loans, credit cards and other debts should not add up to more than 36% of your monthly income.
The 28/36 rule will keep you on a budget, and help you figure out how much house you can afford. However, they are not firm guidelines.
Dave Ramsey is more aggressive and suggests paying 25% for housing expenses.
He even suggests paying cash for the house if possible.
It’s advice Ryan and his wife value. They’ve listened to Ramsey and are currently living debt free.
“We paid our home off. Now we are looking at if we buy a new home do we want to go back in debt with a mortgage? Do we want to pay for our home with cash? We are looking at how much home do we want to buy and how does that impact our finances?” Ryan said.
Living debt free is a movement, especially with millennials. Some of them are even forgoing home purchases, living in RV’s, so they can live debt free.
Debt free living is something all generations aim for, though.
For Ryan and his wife, they’ve always lived within their means and focused on saving.
“Our first home we bought we did not buy a huge home. We bought within our budget, and that made all the difference,” Ryan said.
They paid it off in less than ten years.
“It was awesome. I can remember when we sent the last check in and it felt great. It felt great not to have any debt payments for the last couple of years. It’s hard to think about going back into debt once you get used to that,” Ryan explained.
Housing expenses
Housing expenses are so much more than your mortgage. While homebuyers don’t pay realtor fees, there are costs you’ll pay out of pocket. You’ll pay for inspections and the appraisal. Make sure to factor in those costs in your home buying budget.
Also, figure out your downpayment. This is a big one, and a financial advisor can really guide you on this decision.
He’ll be able to tell you if you should take money out of savings, sell stocks, or use the equity of another home sale.
If you’re not paying cash, Dave Ramsey suggests at least a 10-percent downpayment. Even with that amount, you’ll still pay private mortgage insurance or PMI. You pay that up to a 20-percent down payment.
You can pre-pay PMI, or pay a monthly fee until you have 20-percent equity in your home.
Finally, don’t forget property taxes and insurance in your monthly mortgage payment. The loan payment is one piece of the puzzle.
Use a mortgage calculator to find the amount that works with your budget. Bankrate, NerdWallet, and MarketWatch calculators help you figure out how much house you can afford.
Try the calculators with different down payment amounts and loan terms. While you’ll pay more upfront, a 15-year rate saves you money long term.
Don’t max out your budget. Remember the 28/36 rule. With a house, you need wiggle room in your budget for unexpected housing expenses. If you didn’t have an emergency fund before, it’s a must with home ownership.
Once you’ve done the math, start searching for your next home.
Smart home buying strategy: housing wants versus needs
Technology makes home buying easy. You can look at hundreds of homes all from the comfort of your couch.
Ryan and Katy don’t even have a realtor yet. They’re still doing their homework to figure out what they want.
Those wants keep changing when they see what they get for their money.
“What we are finding is there are some things you have to make concessions on. They are nice neighborhoods but the house might need updating. Spending that kind of money it’s making us be more patient in our search,” Ryan explained.
They’ve seen older homes that need remodeling. As new parents, that’s something they have to weigh. Time is valuable.
For them, the community continues to come out on top.
“We’ve seen houses that are awesome but we are not sure the community is the right fit so we’ve taken it off the list,” Ryan said.
Ryan and his family are looking ahead to when their son is in school. So, they’re focusing their search in the Liberty and Parkville school districts.
Discuss your home buying strategy with your partner
Now that they know where they want to live, it comes down to how much are they willing to pay?
Is a spa-like bathroom and fantastic kitchen worth the freedom they feel living debt free?
“It’s an ongoing conversation between us to make sure we are always on the same page,” Ryan said. “With a child, our goals have changed. We’re in continuous communication with what we want that to look like. We don’t always see eye to eye on it and it’s good too.”
Everyone’s wants and needs are different. That’s why a conversation is necessary.
At times, you’ll disagree on the finances. It’s ok. That’s part of the process.
Finding the perfect home buying strategy requires constant communication with your partner. Take the advice of the 28/36 rule as just that — advice. Be specific about what you’re willing to pay each month.
For Ryan and Katy, it’s important that they get as much family time as possible. Katy works part time. While it effects their budget, that extra family time is priceless.
For this Kansas City couple, managing their budget is a huge part of the home buying process. They aren’t persuaded to adjust their budget based on a home’s assets, and you shouldn’t be either.
What’s your best home buying strategy that kept you from going broke?
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