If you are thinking about buying your first home, you may be tempted to buy your dream home rather than a starter home. Today, the foreclosure levels are high and home values are low. During such circumstances, it is not a good idea to take on more home than you can afford.
In the past, many people bought what was called a "starter home," a smaller, older home that may also have been a fixer-upper. Later, encouraged by easy mortgage terms, many first-time homebuyers stretched their budgets and bought larger homes that better met their expectations.
Even today, most first-time homebuyers do not consider buying a fixer-upper, even though most thought affordability was the most important aspect of buying a home. Before you give up on a starter home or fixer-upper, consider these economic changes that could squeeze your housing budget.
Economic changes that may affect your home purchase
These economic realities may cause you to think twice about spending too much on a home.
Inflation. In times of inflation, employees would usually get large annual raises to help them compensate for the cost of living. Today, in times of flat prices or even deflation, those big raises are few and far between.
Two-income families. In the past, it was common that families had a single income. If the family had financial problems, the other spouse could go to work to help pay the mortgage. Now, most families have two incomes, both of which are necessary to pay the mortgage. If one spouse loses a job, the family is in trouble. Try to base your home budget on one income, or maybe one and a half incomes to make sure your housing payment remains affordable in case of job loss.
Lending practices. Back in the 80’s or even the 90’s, lenders made it difficult to qualify for a loan that was not easily affordable. Over the years, it became easier and easier to qualify for larger mortgages. Today, mortgage qualifications have tightened up quite a bit, but don’t forget that lenders will still loan you the maximum you qualify for, which usually isn’t what you should be spending.
Retirement savings. Going back to the 80’s again, many people’s retirement plans came from a employer-sponsored pension, and Social Security was not in trouble. Now, most people have to save for their own retirement using IRA and individual 401(k)s, so less money is available for large mortgage payments.
Looking at these financial trends, it becomes clear that homebuyers should be looking to reduce their housing budget so they can be sure to keep up with mortgage payments and build equity in their homes.