I came across this great blog from Trulia’s Real Estate and Lifestyle expert Michael Corbett that I had to share!
Buying a home that you simply can’t afford is now taboo in this now smarter, more conservative, and ultimately healthier market. It’s one that takes the pendulum swing back toward prudence and restraint. How buyers buy, guidelines for bigger down payments, and qualifications for mortgages have all become more stringent.
The year 2000 marked the beginning of the wild era of overspeculation. The traditional rules of home buying were ignored, disregarded, and abandoned. All the classic rules that had been the guidelines for the past forty years were cast aside, and a whole new way of real estate investing emerged. What was the outcome of this complete disregard for the classic time-tested rules of home buying? The outcome is the “New Rules for Today’s New Market.”
You Need Money to Buy a House!
You need to come up with the cash to put down a legitimate deposit. This rule is pretty straightforward. No-money-down purchases—no way! Very little down, because you can barely afford the house to begin with―no way! No money down can immediately put you into a negative-equity position—especially in a downward-moving market. The days of 100 percent financing are long gone.
If You Can’t Afford It, Don’t Buy It
Don’t buy beyond what you can afford. It’s easy to fall into that all-you-can-eat attitude when it comes to your first home purchase. You “want it all” when it comes to size, amenities, location, etc. But remember that your eyes may be bigger than your wallet. Even in this new market with tighter lending restrictions, just because a bank or lender is willing to lend you the money to buy a house, that does not mean you can afford it! You have to be realistic, do your homework first, and buy within your means. If the only way to get into real estate is to take a loan out of your 401(k) plan, then you shouldn’t be getting into the market just yet.
Low Credit Scores Lock You Out
Good credit opens the door to success and bad credit will close it. With so many tighter restrictions on lending and mortgages, it is imperative that you have as close to perfect credit and scores as possible. That is why you need to tackle this one immediately and get your credit in order
Less Is More. Think Small.
When it comes to buying a home, think smaller. Less is more. In this new economy and today’s new market, downsizing is in vogue. Smaller houses, no more than three bedrooms and two or three baths, are also going to be a commodity in the coming years. As population patterns shift, and as the baby boomers downsize, there is going to be a great demand for smaller homes. Those five- and six-bedroom McMansions are not as popular as they used to be. They are more costly to maintain, you are paying for space you may never use, and they are harder to resell. Smaller homes are more practical and affordable, and their value will continue to climb as the demand becomes greater.
Just Because It’s a Distressed Property Doesn’t Mean It’s a Good Deal
Just because a house has been taken back by a lender or the government doesn’t mean it’s a winning deal for you. Don’t assume that every house in foreclosure is automatically a steal. Remember, if it were a fantastic home and an amazing property, the original owner might have been able to sell it to get out of foreclosure. There is a reason it didn’t sell. And even if it’s currently priced well and it seems like a good deal, there are plenty of hoops you have to jump through and roadblocks you will have to overcome.
Don’t Bank On Market Appreciation
Don’t overpay and expect the market to bail you out. A huge homebuyer’s mistake in the recent downturn was to overpay, expecting the market would save you with the kind of astronomical instant appreciation we saw in 2002–2006. Nope, it’s not going to happen again. Sure, there will be long-term market appreciation, but the kind of short-term growth we saw back then—sorry! You must make sure the numbers work even if market prices do not increase in the short run. Make sure you only pay based on what the house is worth today—not what it will be worth next year or five years down the line.
Whatever the Bank Will Lend You, Take 20 Percent Less
Let’s say you go to a bank or a mortgage broker to get preapproved for a mortgage. You say, “I want to buy a house; how much of a mortgage will you give me?” In other words, “What price house can I afford?” The bank or mortgage broker will evaluate your finances, income, and savings and say, “Well, Mr. Smith, we think that you can qualify for a $400,000 mortgage. Which means you can buy a house for $500,000! Congratulations.”
If they are offering you a $400,000 loan, say, “No, thanks.” Subtract 20 percent from that loan amount and bank on a $320,000 loan instead. Thus the house you should really be shopping for will need to be around $400,000. By taking 20 percent less of a loan than what the bank has to offer, you are safeguarding yourself and your financial security. You automatically create a built-in buffer for yourself in case of an unforeseen problem.
I know that I am dating myself when I say this, but many of these new rules are old rules . . . tried-and-true rules that have been around for decades. Many of the new rules I have discuss and will continue to share on my blog are based on the classic and conservative, solid home-buying rules that I’ve followed since I began buying properties back in 1979. These “New Rules for Today’s New Market” are critical for every homebuyer, homeowner, and real estate investor. Learn them and play by them, and you will have a safe, secure, and satisfying home-buying experience.