First Time Home Buyers Misunderstand Their Budgets
Most first time home buyers misunderstand their budgets. These are not only buyers, but also shoppers who didn’t buy. According to a recent survey by Realtor.com, most first time home buyers were surprised at what they were able to afford. More than two-thirds found that their budget wasn’t accurate. Some first time home buyers found they could afford more home using the lender’s criteria instead of their own estimation. This appeared to be almost solely due to a drop in interest rates. The rapid, steep escalation of interest rates likely produced fewer buyers surprised to able to borrow more and produced more buyers surprised to find they don’t qualify for what they thought. The buyers who found that they couldn’t afford what they thought they could even with a drop in interest rates are now out of the market. Now that rates have jumped, budgets have been scrambled.
There can be a substantial difference between what a buyer can afford under lender criteria and what a buyer can afford under a true budget. A true budget follows uses the actual income and expenses every day of the buyer. This is especially important for first time home buyers who aren’t in high income brackets. As income increases substantially, the portion of income needed to pay for basic necessities becomes a smaller part of the budget. Higher incomes allow greater flexibility in qualifying. A lesser percent of income toward basics frees up money towards affording a more expensive home. Winning Mortgage, Winning Home provides a step by step guide to know what a buyer really can afford.
Side Effects and Regrets
A side effect for those who increased their budget following lender criteria instead of a true budget likely overbid in bidding wars. In essence, the drop in rates persuaded buyers to pay more for the same house by overbidding! Along with a higher price comes higher expenses. Higher property taxes, higher property insurance, higher PMI and higher additional costs which may not have been in the budget!
Further results from the study indicated that about 20% had to look at less expensive neighborhoods. And about 20% had to give up features on a wish list because they misunderstood their true budget. In fact, about half of those who bought a house had fallen in love with a house where they were outbid. Or they bought and learned later they could not afford what they bought. Falling in love with a house and stretching the budget is a common mistake with potentially severe consequences. The same was true of about 40% of prospective first time home buyers who hadn’t bought a home. They were outbid or found out later the house they wanted they really couldn’t afford.
Now that interest rates and inflation jumped, lenders see a flood of complaints and regrets. Buyers moan about why the lender lent them the money they asked for! They find their budgeting failed. Lots of buyers now juggle money every month.
Restrictions and Uncertainty
New restrictions came into force with the 2010 Dodd-Frank legislation. Additionally hesitation by lenders rose against taking the kinds of risks that were typical before the housing crash. Coupling these made it harder to get a mortgage after 2010. As a result, budgeting and planning for home buyers has played a greater role in getting approved. If you aren’t familiar with QM/ATR rules, you may be in for a surprise. The new Biden group running the CFPB (Consumer Finance Protection Bureau) created chaos by shelving the Final QM/ATR rule. This leaves lenders with less certainty, even after extensive groups working hand in hand with CFPB to develop the rule. CFPB may relent on the delay, but there is clearly continued uncertainty.
Be Prepared
In the survey, half of the home buyers stated they were able to save for a home in less than three years. Winning Mortgage, Winning Home outlines steps these buyers took to be prepared for that home purchase. It details the risks in rate locks/rate lock extensions and closing periods.