Almost all first-time home buyers find that their income will only allow them to qualify for a fixed-rate mortgage that will buy a house that is smaller or less desirable than the house they've been dreaming about. When they discover this limitation, many young couples start talking to their loan officer about an adjustable rate mortgage with a low starting interest rate. This may allow the buyers to qualify for a loan on a nicer house, but they'll still struggle to make enough money to cover the low initial monthly payments. Most people assume they will be making more money by the time the interest rates begin to rise, but history has shown that this is quite often an unreasonable assumption. In the last few years, many mortgage lenders and brokers have heavily marketed to people who aren't truly able to afford the financial burden of their loans. Customers are lured in by low initial interest rates that last only for a few months - long enough for the buyers to qualify, but not long enough for them to find additional sources of income to cover the increasing monthly payments. These folks then find themselves part of the statistics in the sub-prime mortgage crisis, losing their dream homes to foreclosure.
The most rational alternative is to look for a loan first, long before you begin looking for a house. Shop around for the fixed-rate mortgage that has the lowest interest rate and closing costs. Then go looking for a house that actually costs less than the loan you're prequalified for. This means you will be approaching the home buying process more like a true investment or business venture, instead of allowing your emotions and dreams to make unwise financial decisions for you.
Unfortunately, few people would agree with this advice. The difference between the money they are allowed to borrow and the house they've long dreamed of owning is already startling. If they begin to look at houses that are listed for less than the loan they qualify for, they may become so discouraged that they give up the idea of home ownership completely.
The housing market propped up the US economy for many months, and there is now deep concern that the slowdown in the housing market could cause significant slowdown in the economy as a whole. The fall in the value of the dollar against the Euro is thought to be caused, in part, to international worries about the subprime lending crisis in this country, which was caused by the excessive number of loans given to people who couldn't really afford them. There has been a frenzy to buy overpriced homes on inadequate income, and many people can't bear to consider the possibility of living in the kind of house they can actually afford.
An alternative philosophy is beginning to take hold in the small house movement. Some people are beginning to realize the full environmental costs of building, operating and maintaining large houses, and other people are beginning to realize that they are more comfortable in smaller rooms, which are also easier and less expensive to decorate and furnish. If a smaller home is an option, it's almost always possible to find one that costs less than the amount you qualify for. The lower listing price will also reduce your down payment and closing costs, so you may have a bit left over in your bank account as a cushion in case something comes up. If your car needs repairs or you have a few medical bills, you'll still be able to make those monthly mortgage payments.
If you cannot abide with the idea of finding a smaller house than you qualify for, another option is to purchase the larger house you want, but in a less desirable neighborhood. A house in a working class neighborhood may not impress your professional friends, but the lower mortgage payments may be worth the move - and you could be the vanguard of a 'gentrification' movement in the neighborhood.
You can also save on the initial price of a house by finding one in less than perfect condition. Many homes are sold for far less than they are truly worth simply because the seller failed to paint the walls before listing the house, or the home has been left empty without proper upkeep on the lawn. Perhaps a new carpet is needed, or the wood floors beneath the old, grungy carpet could be refinished. Perhaps you can see that the outdated fixtures in the bathroom could be replaced relatively cheaply, but the seller just didn't want to bother doing it.
Although living in a house that is being remodeled could be an unwelcome strain on any couple's relationship, most people can survive the few days it takes to paint a room or two. If you're willing to do it, you could knock thousands of dollars off the loan you have to sign for, and that will result in many more thousands of dollars in interest payments that you never have to make.
It just doesn't pay to set yourself up for the heartbreak of foreclosure. Try to ignore the positive, bubbling marketing efforts of your mortgage broker and real estate agent (who are both looking for a bigger commission), and find a house you can truly afford - even if you don't get that raise next year.
Jonni is the author of a new report that shows the steps she took to eliminate mortgage debt by buying a small house, with cash. Want to know more? Visit BuyAHouseWithCash.com
