Between 2006 and 2014, about nine million homeowners lost their homes due to foreclosure or short sales, and it can happen again. Home prices across the nation are now surpassing levels prior to the Great Recession. Financial institutions are enticing homebuyers with low downpayment offers and low credit score requirements.
To avoid becoming a statistic, homebuyers need to evaluate their ability to repay a long term mortgage realistically.
People who are either just starting a job or could be transferred at any moment are not in the best position to buy a home. Until they have established some security, renting is usually the best option.
The ability to make a sizable down payment increases the likelihood homebuyers will be able to pay their mortgages. Making a 20% down payment means they won’t have the cost of mortgage insurance or interest on a 2nd mortgage. Monthly payments are reduced, keeping their debt to income ratio at a liveable rate.
The more disposable income homebuyers have, the less likely they are to default on their mortgages. When they aren’t stretched thin by too high mortgage payments, they can withstand a temporary job loss or medical emergency.
Those who live in an area where the price to rent ratio is low can benefit from buying. On the other hand, in high price to rent ratio areas, the soundest financial move can be to rent and let the landlord run the risk of defaulting on his or her mortgage.
Size matters. Homebuyers looking at more houses than they need just to impress can find themselves underwater and on the street. The larger the house, the more it costs to maintain it, furnish it, heat and cool it, pay insurance on it, and pay taxes on it. Seniors downsize for a reason.
Those in the market for a home should buy for the right reasons. Attempting to impress friends and family, attaching happiness to a home purchase, and overreaching in the name of investing are not good reasons. At its core, a home is simply a place to live. No home is worth risking your financial future.