If you are like most of us, you drool during episodes of "Lifestyles of the Rich and Famous" -- huge mansions with more bathrooms and bedrooms than you can count, indoor pools, home gyms, master suites and enough land to stable and ride a horse. However, if you are like most of us, a home like this is beyond your financial reality.
When you begin your house hunt, be realistic about your needs and desires. Understand that a home's actual cost is more than the selling price. You will have to add those numbers in when you are determining affordability.
Basic expenses include closing costs to cover loan setup fees, property inspections and escrow or title company's fees. The interest rate on your loan and the length of the loan will add to the final purchase price; if your mortgage has an adjustable rate, then your monthly payment may change periodically. Make sure you know exactly how much this amount can fluctuate. There are property and school taxes, utility fees, and, depending on local regulations, there may be occupancy certificates, hookups, warranties and more. If using a lawyer to help guide you through the process, tack on legal fees.
Don't forget moving costs, furniture and appliance purchases and home insurance. Figure in commuting costs. If you are buying a co-op or condo, or a home in a community overseen by a homeowners association, there will be additional monthly fees and improvement assessments. Depending on how long you plan to stay in the house, consider adding in the cost of modifications for any big life changes, such as child safety or senior accessibility. It's a wise idea to tuck away money, and replenish it as necessary, to help cover routine and emergency home repairs. While home insurance will cover most incidents and damages, there will be a deductible.
Common, but not ironclad, formulas a lender will use before granting you a home mortgage include:
--Wanting a 40 percent down payment on the purchase price of the house.
--Knowing how much of your gross income is necessary to cover your total debt. Banks generally prefer less than 40 percent.
--Knowing whether a maximum of 30 percent would cover your total monthly mortgage payment, including principal, interest and taxes.
Getting a loan prequalification will give you an approximation of what you may be allowed to borrow, but the house -- condition, location and selling price -- may vary the approved amount. Examine your own finances and future plans. Are you applying for the mortgage based on two full-time incomes? If planning to have a family, will there continue to be two full-time incomes? Are you or your spouse nearing retirement or planning a career change? Allow for other lifestyle changes such as education, family milestones, illness, new cars, and even vacations and travel. If you are not planning to remain in this home for more than a few years, your up-front costs might not be recovered.
Circumstances can change unexpectedly, and if you are "just able to make it" with your current finances, the house may become unmanageable quickly. Because your home is collateral for a loan, your lender may look to foreclose if you can't keep up with payments.
So leave tennis courts and horse stables to celebrities, and focus on building the best home for your budget.