You Qualify to Buy the House, But Can you Afford It?
Here in Central Connecticut we are still in a buyer's market. This adds additional value for buyers, as there are homes that are within the upper reaches of their buying power that would be beyond them in a sellers market. This adds a temptation for them that needs to be rationally considered before jumping into a contract.
Having a lender's pre-qualification letter in hand gives them an indication as to how much credit they have available for their home purchase. Even before they put that offer on the house they want to buy, their agent should review the purchase price with taxes considered as well as any other issues or concerns the agent may have on the house.
Paying a mortgage is somewhat similar to paying rent, only so far as the monthly outlay from their budget. The mortgage payment includes escrow for taxes and insurance usually as well. If a buyer buys within the value of their abilities or less, thee should always be sufficient left over from their budget to cover typical home owners 'Oh No's.
The 'Oh No's, to a homeowner are the sounds of leaks, breaks of just no sounds that come from just the life span of appliances expiring or just breaks due to unfamiliarity with use or accidents. Many of these can put a burden on a budget and while people need to eat and have heat, they also need to make that mortgage payment on time.
Even beyond that are the issue that can arise when making a purchase that starts as a real bargain, but gets to show it's reality after making the purchase.
With this I am speaking primarily of a buyer that I have been showing homes. This buyer was single and earning a good income so values were not going to be an issue. What presented itself, especially in our state as a buyers market, was an offer too tempting. A foreclosure came on the market, and it had been on and off for a while. It's current value was for sale at $260,000 which was well within his buying range. In looking at the details of the home, and it's assessed value for the town where it was occupied, in good condition, the home would have a market value closer to $460,000. In addition, it needed work even before the buyer would be able to occupy to an estimated value of $30,000.
Neither of these would be a problem, provided the income stayed as it was, part of which was income from overtime. If something were to happen to the buyer such as illness, the extra money would not be there as insurance does not pay based on overtime.
The cost of maintaining that home would fall beyond his means, and issues would present itself that were completely unexpected and could be avoided if all were thought through before making that offer. As these were discussed, he recognized that it was beyond his ability to afford the home, even though he was qualified to buy the home.
In our market here in Connecticut there are many homes that are available that are potentially the type of home that can hurt a family if not bought properly and the entire cost of ownership is considered.
Buyers in Connecticut need to work reliable lender as well as an agent that will work with them to get them into a home that is a proper fit for their family as well as their wallet.
If you are looking to buy a home in Central Connecticut call me 203-206-0754 or send me an email. I would be happy to assist you or to discuss you Connecticut home purchase.
You Qualify to Buy the House, But Can you Afford It?
Search for all Connecticut homes
Do you know somebody who is behind on their mortgage and doesn't know what to do? I may be able to help them, especially if they are facing foreclosure!
Get Help with Short Sale in Connecticut
www.ctshortsalesilva.com
Whether looking to buy or sell, we service the Greater Waterbury towns of Beacon Falls, Bethany, Cheshire, Naugatuck, Middlebury, Southington, Thomaston, Waterbury, Watertown and Wolcott
Ed Silva Mapleridge Realty, LLC, 203-206-0754
Hi Ed, It is sometimes hard for buyers to understnad the difference between what they qualify for and what they can realistically afford.
Ed - it is certainly not a good idea to be "House Poor". Some people have no room for contingencies.
Good evening Ed Silva . I know a lot of folks who are house poor and they regret it.
Ed Silva Great minds think alike . Many people do not wnt to be house poor . i just wrote a similar post in theory
I can't imagine actually having a mortgage that is 31-33% of my GROSS income each month. That's what I could qualify for, but not what I should pay.
Ed buyers need to look at the big picture and the OH No's have to be taken into consideration ahead of time.
The maintenance is a big part of homeownership and one of the reasons that homes go into foreclosure. It is important that a buyer has a budget and looks at not only the front end costs but the ongoing costs.
Hi Ed Silva , For the most part, the young first time home buyers are pretty smart, as they are looking at homes way below of what they were approved for, in order to be prepared for any future situation. I am impressed.
Ed, most of my clients are a lot more financially conservative that most of the lenders.
Most buyer I have worked with explore what they can get qualified for, but then come up with a budget that makes sense with their goals. However, I am sure there are those that don't do this.
Ed - You make a great point. Yes, you can afford to buy that home, but do you really want to be house poor and not have any money for emergencies or necessities.
Excellent post and I agree buyers need a good lender and a good Realtor to ensure that they can afford the house.
Ed Silva great post that differentiates between the two - yes, pre-qualification is fine - what about affordability based on many other factors?
Yes, good points. Often when there are homes that are highly discounted, they have a lot of upfront and ongoing costs. In addition to that $30,000, I'm sure there would be another few big chunks of change. Often when one thing goes, the others are on their way out.
Thanks for sharing:
The mortgage payment includes escrow for taxes and insurance usually as well. If a buyer buys within the value of their abilities or less, there should always be sufficient left over from their budget to cover typical home owners 'Oh No's.
Good morning Ed. A well deserved feature and such an important topic. I take income into consideration, but primarily focus on their comfort level for a mortgage payment.
Good Morning Ed,
The buyers' mortgage payment inclusive of PITI and MI if applicable should be well within their comfort level. And this is something I remind my buyers before they start looking at houses and fall in love with it.
This is true - qualifying for a certain amount does not mean that's what would be an appropriate amount to spend. I love when a buyer tells me "I qualify for $xxxK, but I don't want to spend that much - only $xxxK". Good thinking!
Hi, Ed - Your blog is an excellent reminder to agents to probe deeper with buyer's about their finances in a purchase. Upkeep and especially emergencies can turn a "happy homeowner into an unhappy one". For example, a client of mine had an unexpected car problem that almost caused them to lose her home.
Congrats on the Feature Ed!!
I made a little Valentine for you and your wife.
when the mortgage is tight and something goes wrong...its the titanic upon you
Ed Silva -- Great post. I have experienced this problem first-hand.
My wife has a condo in Scottsdale that is now a rental. When it is rented, the rent payments cover her mortgage payments and almost cover insurance and $350/mo HOA dues. However, when anything breaks, it is a catastrophe for us. A few years ago, the washing machine sprung a leak and flooded her unit as well as the one below. It was a big surprise to learn that the insurance provided by the HOA did not cover this type of disaster.
Ed, this is a must read for anyone planning to move up in size of the house they want. Along with that bigger house come larger maintenance and utility costs. I remember going from a 1300 sf. bungalow to over 4000 sf home...after the shock of my first month heating bill that was over $700 I started looking for another home!
Some people just should not be buying a house. They cannot afford the responsibility and maintenance that comes with owning a home.
There are many costs to consider when buying a home. I agree, qualifying to buy a home doesn't necessarily mean the buyer can afford a particular home. Buyers should listen to knowledgeable real estate agents, which sounds like your buyer did!
That's right! Buyers sometimes forget to this of the other costs which are incurred in their home purchase. You are right about being able to afford being another subject.
Ed Silva Great post and you are so right. The full cost of ownership must be considered sooner rather than later. Sure, the buyers are approved for a certain amount but can they really afford it comfortably when everything else is calculated in.
I just had this discussion with buyers last week. Thankfully they understand and don't want the home to end up owning them. Great post, Ed.
It amazed me, when I was in banking, the amount the lending institutions will give people, but when you look at their cash flow there is no way they can stay afloat. Until things change on the lending side, there will always be a distressed market, and I can't say it is completely the borrowers' fault.
Ed - The difference between being qualified and being able to afford is something I wish more lenders would discuss with buyers as there is so much to consider.
This is so in line with my feelings about being a good Realtor - taking care of the clients' true best interests and not just making money from a purchase they can't really afford.
Great Post...I too agree that we should help Buyers understand the "total" costs of owning a home, and stay within their comfort zone for the total payment. The have a certain lifestyle and way of living to consider as well that does not get budgeted into a Lender qualification.
Ed, you definitely bring up the difference between what the lender says you can qualify for, and what your checkbook says you qualify for. There is a difference. Great post!
Wonderful post Ed! We are just coming out of a housing crisis because people in many cases were talked into buying houses they thought they could afford as the result of over zealous lenders. Starting to see 100% financing again which makes me crazy! If you don't have enough for a down payment, maybe you shouldn't be buying!!!
Ed, you bring up SUCH good points for all of us to adhere to. Very smart to point these possible future issues to your client and thus protecting him from the starry-eyed way he could have looked at this property.
I am starting to really hone in on the pre-qual piece of it so that I don't waste my time with some of the more reasonable homes out at Fishhawk Lake that folks are showing an interest in.
Great feature, congrats!
Ed
This is a really important point, as I think some buyers do not consider all the additional costs of purchasing a home, short term and long term, and may not have the reserves. The other issue is some buyers do not have a good sense of their true budget - they qualify per the bank but if they were to look at their actual monthly spending would realize it might not work as they thought, or things will have to change.
Jeff
I would love to send referrals to an agent like you as I know you would take great care of my buyers and sellers.
So, while buyers are eager to buy and stretch their budgets or leverage their future income regardless of their lifestyle, shouldn't they get a comprehensive analysis from their agent as to the timing or the pragmatism of buying real estate? Being prudent is a challenge, isn't it, when the opportunity could be lost? However, as professionals, it's essential to ensure that the purchase is suitable for our clients regardless of the circumstances.
Ed Silva
Love the title - it is the heart of the situation. Yes, qualify but do you realize that means no vacations for five years? As many have said before this comment - RESERVES are essential.
All the best -
Lynn
Ed, you touched on a subject that rarely gets discussed. Just because a buyer gets a Mortgage based upon their gross income this does not consider all other costs of ownerwship.
Ed, thanks for the post. Great information and all to aften ignored by Realtors and lenders alike. To me its part of the job to educate and inform our clients about these often overlooked factors when considering a home to purchase.
Wise advice. Consciencious agents will counsel their buyers on the costs of owning a home that go beyond the monthly payment. Even routine items such as painting and cleaning can add up.
Buyers should also look beyond what a lender says they can spend to see what portion of their income they really want to devote to housing. For some, things like an annual vacation, 4-star dining on Saturday nights, week-end ski trips, and giving the kids music lessons are all important.
A lot of people buy more home than the can aford, take care of, or need. I see many buyers with much more common sense now.
This is something I discuss with buyers up front...and why they should see a lender BEFORE they start looking at homes. No use looking in a price range the buyer isn't comfortable with!
So true Ed!
I recently have met with a mortgage person who has given me an amount that I qualify for, to get a mortgage, but there is no way I want to put my name to that much!
She even tried to get me to go for more & I said I don't want to be paying more than $X amount per month. Period. I need to know I can handle the payments & any 'just in case' situations that might crop up...
Why would she even ask? I don't understand that...
Excellent post and sometimes it is very hard to make an eager buyer understand all of these points.
Like J.R. and others have mentioned, lenders can be "too generous" because only a wise buyer can know how much they can truly afford with their lifestyle. The debt ratios to me are arbitrary only because the ratios assume people are frugal and balance their budget monthly. Even if we account for possible repairs, if someone lives paycheck to paycheck the ratios go out the window if any unexpected event occurs.
Ed I guess I am late to this party, well deserved Gold Star... to many people do not understand all the hidden costs which come with home ownership. Last week we rewired the electric wires of the house...this was a planned project... during the coldest period of our winter the heater went out eventually it cost as much as if we bought a new heating system.... an unplanned project....Endre
Agreed, except that in my case I review these numbers in advance, sometimes even before they speak with a lender. AND our contracts in Arizona require them to be pre-qualified to purchase. I go a step further by making sure they've applied for the loan!
Great post Ed, I have heard of this situation happening and it is never good.
This is a well deserved featured! You state the facts in layman's words. This is a very important topic and you wrote it proficiently with meaning that wasn't confusing.
Great post and something to think about. I always tell my buyers to think about having 5-10% of the sales price for home repairs and upgrades, so the home will be more to their liking. The percentage will depend on if the home needs repairs or upgrading.
I enjoyed your informative post, glad I came across it in the archives.
I've seen buyers blindsided by unforseen repairs after the closing. Reality can be a nasty surprise.
There are a lot more numbers (dollars) involved with homeownership beyond the PITI.
Good morning Ed Silva ,
I came over after catching your post when Winston Heverly reblogged. Excellent post pointed out all the costs of home-ownership beyond that PITI a buyer makes each month!
Good morning Ed and I also saw it re-blogged. Well-written and informative post for potential homebuyers and why not to stretch too far when purchasing a home. Thanks for sharing it with us!