Yesterday's Wisdom, Revisited
In Today's Slump, Popular Market Advice Can Often Use a New Perspective
(Illustration by Jonathan Carlson for the Washington Post)
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Saturday, June 20, 2009
We all know the game has changed. The homes aren't as expensive, credit isn't as easy to come by and the for-sale signs actually stay up for more than 30 seconds before an offer is made.
Agents, buyers, sellers, and helpful friends and family offer their advice about how to navigate this market, based on their experience or what they've heard. But these days, some of their suggestions might be more valid than others.
Heard these before?
-- You can afford a mortgage, including taxes and insurance, that's a third of your gross income.
There are two parts to determining how much mortgage you can afford: what you feel you can pay and what the lender thinks.
The first part isn't affected much by whether it's a buyer's or a seller's market. To explain, Frank Donnelly, a member of the Mortgage Bankers Association of Metropolitan Washington's board of governors, uses an example from his own life: When he was single, all he wanted was a place to sleep. He wasn't into decorating and still wanted to travel and go to restaurants. He wanted to keep a good chunk of his income free. But for one of his friends, home was extremely important. She was willing to spend a higher percentage of her income on a home than he was.
"Are you willing to make sacrifices?" Donnelly asked. "If it came to sacrificing for vacation, is it worth it to you or not?"
It can be more than vacations and dinners out. Do you have any big expenses coming up? If your car is about to die and you're going to have to buy a new one, take that cost into account.
Dan Lash, a financial planner in Vienna, said that when deciding how much to spend per month, potential buyers should also keep in mind other long-term investments -- like retirement. Make sure buying a home doesn't keep you from having enough money saved up to retire or have a college fund.
"It's easy to say in general people should be buying homes right now. But at the end of the day you have to look at each person's situation," Lash said.
The second part -- what lenders think you can afford -- has changed with the market. No more are loans approved without income verification or based on the idea that the value of your home will soar. Now it's back to the old rules and ratios.
