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How Much Home Can You Afford?
Before you start looking for your first home you need to decide how much you can afford to spend. Most lenders will allow a mortgage payment equal to around 28% of your before tax income. Do a search for how much house can I afford and you will find many calculators that will help you find the answer to this question. I think most assume that you will be living on a very tight budget. You will be much more comfortable if you buy less house than you can afford. You will have to pay real estate taxes and homeowners insurance and the cost may rise every year. When your taxes and insurance goes up, so does your house payment.
These calculators don't take into account the fact that a home needs repairs and you need money left in your budget to take care of unforeseen expenses. I have been out looking at homes and most of them need a new roof and new siding. The owners bought more home than they could really afford, can't afford the repairs and now have to sell or worse yet they are being foreclosed on. One thing is obvious, and that is they spent no money maintaining their investment.
A small home means lower utility bills and less maintenance. Roofing and siding is priced by the square foot so re-roofing a 2000 sq ft house is going to cost you twice as much as a roof for a 1000 sq ft house. Carpet for a 2000 sq ft home is going to cost twice as much as carpet for a 1000 sq ft home. Taxes and insurance will also cost much more on the larger house. A small house may mean you have time and money left over to do other things with.
Most real estate agents and home builders don't care if you buy more than you can afford, they just want to make the sale, collect their money and head on down the road. I suggest that when you buy your first home you start a savings account and put at least $100.00 a month in it. Keep this money for repairs and improvements. Work this into your budget when you are figuring out how much house you can afford.
Most of the homes I have looked at have not been well taken care of. No doubt this is because the owners were doing all they could just to make the house payment. Take a good flashlight when you go out to look at pre-owned homes. Look under the sinks and you will usually find some cabinet rot from leaky faucets or sinks. Not a big deal but you need to know it's there. Always look for the access panel behind the bathtub, remove it and have a good look around in there. Bathtubs can have leaks that people are unaware of and major damage can occur here. This is also a favorite spot for termites.
After you make an offer on a house you will want to hire an inspector to look it over. This is going to cost you somewhere around $300.00. You will also need a separate termite inspection. Termite inspectors should look for all wood destroying organisms, that includes dry rot. Make sure you know what you are paying for, my termite inspection years ago was only $50.00 but I suspect all he looked for was termites. Ask both inspectors if they are looking for dry rot. Dry rot is a wood destroying fungus, it can survive in dry wood and return if the wood becomes wet again.
You want to look the house over carefully when you first see it as you may find something that would kill the sale or will affect your offering price. You don't want to wind up paying multiple inspection fees. If you find defects that are expensive to repair you may want to adjust your offering price or find another home.
How much should you pay for a house once you find it? The listing price is just an asking price, you may want to go higher or lower. A real estate agent can print out a CMA (comparable market analysis) of prices homes were sold for during the past few months in the neighborhood you are interested in. Look at the CMA, look at the tax values and consider the condition of the house. If the house needs $10,000 of work and it's not reflected in the asking price you may want to offer $10,000 less than the asking price.
Don't let them take advantage of you because you are a first time buyer. Some real estate agents will talk like the prices are written in stone. The lower the price, the lower their commission, if they don't tell you you can offer less than the asking price, you may want to find another agent. I have had agents call and tell me someone else was making an offer on the house I looked at. Were they telling the truth or trying to pressure me into making a quick decision? Last time that happened the house was on the market another 3 months. I had an agent tell me the house I am currently living in was already sold. We were standing in the house, she is looking at her paperwork, tells me the house is sold and is pushing the one down the street. Seems she got a bonus for selling the one down the street. I went home, called another agent and bought the house she told me was sold. Miss liar lost her commission and her bonus.
Because of the sub-prime mortgage crisis it is harder for people to get home loans. This results in less buyers, homes are staying on the market longer and prices will fall. This is what they call a buyers market. They say it will hit bottom in 2008 or 2009. This means you still have time to start saving up a down payment to buy a house before the prices start rising again.
People that are losing their homes will go back to renting. They expect this will create a shortage in the rental market. Rent prices will be rising as a result. It may be more cost effective to buy a small affordable home than it is to continue renting.
Trends towards smaller homes...