Should you always stretch yourself financially when buying a home? This New York Times article answers with a resounding NO(!). A lot of rules got thrown around during the housing bubble that have since been turned completely upside down. Here are the new rules:
1. Go with a traditional lending terms -- That means 20 percent down on a fixed-rate mortgage. Don't spend more than 35 percent of your pretax earnings on mortage, property tax and home insurance.
2. Base your decision on your income -- A home buyer in their 20s and 30s is likely to see their income increase over the years. Don't fall prey to income overconfidence but this is an argument for stretching a little if you are a younger buyer.
3. Remember the unknowns -- One financial planner encourages clients to model their budget based on all three of these situations: both spouses working full time, one spouse working part-time, and another where one spouse takes several years off from working.
4. Budget for house expenses -- Owners who contract out work will likely pay "3.6 percent of the home's original purchase price annually for maintenance and 4.5 percent if it's an older home."
5. Avoid the middle price -- Either buy your dream house (if you can afford it) or the cheapest home. Buying the cheapest home allows home buyers to save on their monthly mortgage and buy what they actually want several years down the road.
6. Imagine staying in the home longer -- Doing so allows home buyers to avoid the transaction costs involved in selling, buying a new home and moving again.
7. The 'Eight Hour Rule' -- All these rules are guidelines, they may not apply to your situation. The question is: Can you comfortably sleep eight hours a night in this home without it keeping you up at night?