March 1, 2018
March 1, 2018
Homebuyers often focus on buying the dream house. That usually requires buying the most house that you can afford. While that might get you closer to the home of your dreams, it can also cause some complications, both in the home buying process and in your life after closing. There are five reasons to buy less house than you can afford.
Any time you try to purchase a house at your maximum level of affordability – and especially if you exceed it – you open the possibility of problems in mortgage qualification. While it might be that you can easily qualify for a mortgage to purchase a $300,000 home, you may be flirting with a decline, or at least a higher interest rate, by pushing with a $350,000 purchase.
The size of the mortgage you can qualify for is determined primarily by your income and the non-housing debts that you will have after closing. But your credit score and your down payment will also have an impact.
As you move closer to the upper range of your housing affordability, flaws in your overall profile, even minor ones, can become more significant. For example, a 690 credit score may be adequate get you a $250,000 mortgage. But if instead, you apply for a $300,000 mortgage, underwriting can become uncomfortable and decline the application.
Underwriters look for compensating factors – positives in your financial profile that offset the negatives. When you buy less house than you can afford, those compensating factors are usually more abundant. But when you buy at the maximum level of affordability, there may be no compensating factors at all.
Put another way, as goes the purchase price, so go the down payment and closing costs. The more expensive the home that you are buying is, the more money you will need to complete the purchase.
For example, let’s say that you are planning to make a 10% down payment, and closing costs will be 3% of the purchase price of a home.
If you are purchasing a house for $400,000, that’ll be $40,000 for the down payment, plus $12,000 for the closing costs. That’s a total out-of-pocket of $52,000 at closing.
If instead, you purchase a house for $300,000, the down payment will be $30,000, and the closing costs will be $9,000. Your total out-of-pocket costs will be $39,000.
That’s a difference of $13,000 that you will save upfront as a result of buying the less expensive home. That’s a lot of extra cash that can be used for furniture, upgrades, and if necessary, the down payment on the car.
Rest assured that once you close on your new home, there will be a litany of expenses after the fact. The more money you can save upfront on the actual purchase, the more that you will have to cover those expenses. This will also eliminate the need to resort to credit cards to cover all those expenses.
Just as your upfront cash requirement will be higher on a more expensive home, so will your current expenses. The higher the purchase price of the home, the higher your mortgage payments, property taxes, and insurance payments will be. It’s also likely that you will pay more for utilities and for repairs and maintenance costs.
As a general rule, there is a close correlation between the purchase price of a home and the expenses you will incur to keep it. For example, all things being equal, the carrying costs on a $500,000 house will be approximately 25% higher than what they will be on a $400,000 house.
The reduction in your housing expense will leave you with more money for everything else in your life. While it may be something of a cliché, living in the house of your dreams – and eating Ramen for dinner and renting movies at the library for entertainment – it isn’t much fun!
If you buy less house than you can afford, you may not like your house as much, but you’ll probably like your life a lot more.
Everybody goes through a rough patch at some point. It could be brought on by the loss of a job, the failure of a business, a rash of medical expenses, or some other family or financial obligation. If you buy less house than you can afford, you will have an easier time surviving that difficulty.
The lower carrying costs of the home, as well as the extra cash from the reduced upfront requirements, will leave you with more room in your finances to deal with whatever life throws at you.
Everyone these days is concerned with saving enough money for retirement. And probably most homeowners dream of the day when their mortgage will finally be paid off. To accomplish either of those goals, your financial situation will have to be aligned to make it happen.
You’ll be in a better position to accomplish both goals if you buy less house than you can afford. A house is typically the single largest expense in the average household budget. If you can keep that well within your range of affordability, you will have more money left over each month to contribute a retirement plan or to make extra payments on your mortgage.
What we’re really talking about here is making sure that the home you purchase will work fully to your advantage, while not becoming a financial trap. Your house should blend comfortably with the rest of your financial life. And that works better when you buy less house than you can afford.