Bigger is better, right? In some instances, this may be the case but when choosing a home, there are a few factors to consider when deciding how much house you need. Having seen what happened when the housing market crashed, many people are wary to “overbuy” and are being more considerate of what they really can afford. For those with lower incomes or for single buyers, you can still buy, but do you really need a 3,000 square foot home to take care of? Even couples and families are re-evaluating how much space they need and just how much house they want to take on. After all, increased square footage does not just mean an increased mortgage. The bigger the house, the higher utility bills will be as well as increased home owners insurance. CBS Money Watch notes that the average sized home has more than doubled to 2,349 square feet from 983 square feet in the 1950s. You may have more space to spread out but if you are barely able to pay the mortgage on your large house each month you won’t be doing much relaxing in the home. Also, if you buy a large house you then have to clean and maintain that large house. If you are only using the guest bedroom once or twice a year, is it really worth paying to heat and cool that room as well as the time it takes you to clean it? All of these questions certainly depend on your lifestyle, size of family and plans for the future. You may consider that maybe you do not need quite as much space in the home if you have a great yard and spend a lot of your time outdoors. If you love to entertain or have frequent guests, maybe you need a bit more space. It may be tempting to buy a huge home to impress others but ultimately you will be the one living in the home, cleaning the home and paying the bills. You do not need to buy a tiny house that will leave you cramped and desperate for space but consider a smaller home that will save you money and be just as beautiful with its own unique charms.
When you buy a home by using financing, you need to bring money to the table to show that you have some semblance of financial stability. Granted, there are programs that allow you a very small amount of money down, but I don’t recommend them because they cost you more in the long run.
Before I touch on gifted funds, I’ll say that the best way to own a home is to save 20% minimum, purchase with a 15-Year fixed mortgage, and make sure you have at least 6 months savings after moving in to handle all of the unexpected costs that are associated with home ownership.
There’s this thing called Sunk Costs. This is when you recognize a potential future expense, such as a roof-replacement (which is an inevitability) and you intentionally set aside enough every month to cover that expense when the time comes. Often these expenses are forgotten, and when it comes time to repair something big, owners are tempted to take equity loans or credit card loans to cover the costs, which puts them behind the eight ball financially. Don’t be that person. Go into your first home prepared for future expenses, within reason.
Gifting Funds for Down Payments
Some loan programs allow you to receive a gift to cover your down payment. This gift is limited by the investor’s guidelines, but it is deposited directly into escrow by the gifting party, and should the home not close escrow, the money is returned to that person without ever going through you. It’s a great option for families who wish to bless their children by helping them buy the house. Make sure you enter into that arrangement carefully. Assess the financial relationship you have with the gifting party and make sure that it is in fact considered, from start to finish, a gift, and that there are no strings attached. A gift can look like a gift on paper, but there could be relational challenges based upon unrealistic expectations of the giver. Always be cautious and wise when accepting or giving gifts, because you want them to be blessings, not curses.
Lenders are continually looking left and right for potential borrowers and offering solutions to the problem of not having enough money for a down payment. If you don’t have enough money for a down payment, and you haven’t formulated a plan to earn and save enough money, then I would recommend you turn down that gift, because there’s far more to home ownership than just getting into the home. You need to have solid financial stability in order for that home to become a blessing rather than a nightmare.
One lender I know recently sent out a quote:
Wealth is gained very fast through the appreciation of assets leveraged to the max with very inexpensive interest rates as we have now.
I agree that this is possible, but the quote above is ultimately missing critical information which one MUST take into account, risk. I’ve revised the quote to represent a more prudent approach:
Wealth gained quickly through the appreciation of assets leveraged to the max with very inexpensive interest rates comes with as a great a risk as the reward. Owning real estate is a long term proposition that requires financial discipline without which can bankrupt the craftiest of financial gurus.
Don’t be fooled by the notion that leverage is how you get rich quick. It’s also how you end up broke.