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  • Tony Gilbert

First Time Home Buyer? Avoid A Luxury Home!

Buying a home for the first time can feel like a thrilling adventure with plenty of potential pitfalls. Avoiding mistakes is important, especially for millennials who are just getting into the market. One of the most common mistakes millennials are making in the housing market? Buying a home that blows your budget!

a luxury multi-story home
Is your first home breaking your budget?

Owning a home costs a lot of money for the initial purchase and each year of ownership. Owning an affordable home outright can help you reach financial independence, but drowning in debt after buying a luxury home will set you back long-term. Buyers must know they can pay for it, before they start shopping. Here are a few reasons first-time home buyers should consider buying a practical home within their budget.


Related: The 5 Most Expensive Homes Ever Sold in The United States


Luxury Homes May Exclude You From FHA Loans

When people are trying to buy a home, the choice of home can affect the types of mortgages that they can get. For example, the Federal Housing Administration insures loans that allow borrowers with a modest income or a lower down payment to qualify. Specifically, FHA loans require a minimum down payment of 3.5 percent, compared to the typical 20 percent down payment for many conventional loans. FHA loans have borrowing limits that depend on the region. For 2023, the standard maximum FHA loan is about $472,000. In areas with a high cost of living, these loan limits could reach as high as $1 million or more.

When buyers start to factor in the expenses they can handle to buy a home, they should consider additional costs like private mortgage insurance. FHA loans require mortgage insurance as a matter of course. For conventional loans, mortgage insurance is usually only required when the borrower makes a down payment of less than 20 percent. Mortgage insurance can cost hundreds of dollars per month, depending on a variety of factors. Mortgages can help you build wealth, but not if you borrow more than you can reasonably pay back. Before shopping for luxury homes or other high-end properties, buyers should calculate how much they can afford to pay each month for the first few years.


What You Think You Want Isn’t What You Need

As buyers start to make a list of the things that they expect from a home, they should be careful to distinguish between the things they want and the things that they genuinely need. For borrowers who can qualify for many homes in their chosen area, wants can quickly overtake needs during the shopping process. People often feel pressure to buy the biggest house that they can afford, especially if they are planning to increase their household or live in the home for the rest of their lives. They may feel that buying gated community homes or other marks of luxury will set them apart from their peers.

In reality, buying too much house can make various aspects of life harder. Homes that are larger, on bigger lots, require more maintenance. Homeowners who do not have the time to perform upkeep will pay extra to hire a professional, or risk the damaging effects of deferred maintenance. In addition, a bigger house usually comes with a larger monthly payment, which takes away opportunities to save, invest, or spend the money on other things. Sometimes, owning a big, luxurious house ends up being more of a burden than a benefit. There's a time and place for luxury real estate investing, but a first home purchase rarely provides optimal conditions.


Owning a Home Costs More Than the Mortgage

During the home buying process, people may be so focused on getting a mortgage that they fail to account for all the other costs associated with homeownership. Owning a home requires regular maintenance and occasional upgrades. Experts estimate that homeowners should set aside about 1 to 2 percent of their home’s value for upkeep and improvements each year. It is not uncommon for homeowners to move into a new home, only to realize that they must spend tens of thousands of dollars to meet their needs. These costs come in addition to the monthly payment, which may already be a stretch for many buyers.

Additionally, handling these expenses can create an opportunity cost that leaves homeowners stuck between a rock and a hard place. Homeowners who do not make the necessary upkeep for the property can risk various aspects falling into disrepair. In this way, failing to upgrade can even hurt the home’s value over time, even if the homeowner isn’t actively causing damage to the property or the home. In some cases, homeowners end up liquidating some of their investments, or avoiding putting money into savings, as a way to cover the cost. Over time, too much income invested in the property may lead to disappointing outcomes for retirement and other investment goals.


How to Budget for a Home You Can Afford

Ultimately, buyers should be aware of the amount of money that they can afford to spend on a house, independently of what a mortgage lender is willing to loan to them. On certain types of loans, lenders may be willing to approve borrowers who will have to dedicate 40 to 45 percent of their gross monthly income to the home payment and other debts. Since this is based on a borrower’s pretax income, this situation could leave homeowners in a position of having to spend more than half of their net income on the house payment and debt servicing.


Related: Stop Paying Your Mortgage Off Early. Here's Why.


Instead, buyers may want to limit the percentage of household income that the monthly mortgage payment takes. There are a variety of ways to do this, including:

  • Making a larger down payment, to lower the monthly payment

  • Buying a more modest home, to accrue equity and be able to afford a more expensive home later

  • Increasing income, through means of a second job or passive income streams

  • Lowering the monthly payment on other types of debt servicing, by paying off installment loans and credit cards

By using one or more of these methods, buyers may be more comfortable with the monthly payment.


Create a Reasonable Home Buying Budget

When home buyers first start to shop, they can be bowled over by the stunning looks and styles of expensive homes. Buying a home can take a lot of money, but maintaining the home over time also requires funds. It is important for homeowners to be able to afford not just the down payment and monthly payment, but upkeep and improvements as well. By creating a list of priorities and understanding the costs associated with homeownership, buyers can set a budget that will work better for their long-term goals.

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