Seven New Rules For The First Time House Buyer

Are you a first time buyer jumping into the housing market? Confused by the conflicting advice from realtors, mortgage brokers, bankers, as well as well-meaning friends and family members?

The New York Times columnist, Ron Lieber's latest column, Seven New Rules For The First Time House Buyer sets out to debunk a long-standing but underexamined maxim of real estate, "you should always stretch financially when buying your first home," which got many first time buyers into hot soup in the first place, straight into the clutches of realtors and lenders who were only too willing to lend them the extra needed to finance that extra stretch.

It's now back to the basics, since the myth that housing prices only go up and up has been shattered by the recent financial downturn. To summarize, here the seven new rules:

1. Get a fixed rate mortgage, put 20% down and borrow 80%, and aim to spend between 35%-45% of your pretax monthly income on your monthly mortgage payment.


2. The best case for people stretching their income are those in their 20s and 30s, who are starting out in their careers, rather than those in their 40s and 50s.


3. Before buying a house, do a realistic projection of future income flow, asking oneself: what if one spouse loses a job? what if there are children? etc.


4. Too many people forget to factor in the costs of maintaining a house into their calculations on affordability.


5. Buy either the cheapest or the best, but not in the middle. Why? If you can't afford the best, buy a cheap starter home and diligently save up for the best.


6. Consider stretching out the home over time (i.e., making renovations or expansions over time) rather than stretching up to buy an expensive home


7. The 8-hour rule: can you sleep soundly at night or will you stay up worrying about monthly payments? If it's the latter, than the house isn't for you.

As a homeowner who is still living in a house that I bought 6 years ago, here are the rules that guided my own home purchase:

1. I put 20% down and borrowed 80% on a 30-year fixed mortgage.


2. I budgeted for the home based on one income (mine) instead of the combined income of my spouse and I. This turned out to be prescient because my wife chose to leave the workforce to look after our kid, making me the sole breadwinner. Our monthly mortgage payment is comfortably within 40% of my monthly income. I'm glad that we fended off bankers, mortgage brokers and realtors who suggested that we used our combined income to buy a bigger home--no income stretching for us.


3. I aim to accelerate the paydowm of the mortgage by making a 13th monthly payment.

Link: Seven New Rules For The First Time House Buyer (New York Times)
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