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A Plan for Getting Our Dream Home Without Getting A Monster Mortgage
Maybe we will not be picking up a pad like Howard Stern just did in Palm Beach, FL for a reported $52 million, but each of has a vision of our dream. All too frequently though, our dream home comes with a nightmare mortgage attached.
This happens when we squeeze our finances for the privilege of being able to park our car in front of a grand house that we cannot afford to put furniture in. General guidelines say our house payment should be 25 percent of our take home pay. We might even stretch that to 30 percent if we have a clear slate regarding other debts, car payments, etc. The problem arises when either we go over this level, or something happens in our lives - such as having children, losing a job, medical issues, etc. - that demands a big chunk of our relatively constant take home pay.
We want to avoid a house payment crunch and still enjoy our home environment. The idea of a dream home means different things to different people. Either we may look for a special location, or perhaps we envision a special structure with grounds that could be cover fodder for Dwell Magazine. Approaching this critical lifetime purchase with strategies for climbing the ladder into our dream abode without risking a hard financial landing can determine if we will enjoy or regret our new home.
For starters, average home prices are rising once again in some areas. The Midwest and West saw slight price decreases, and the Northeast and South are rising.
Average prices for these regions breakdown as follows:
- Midwest - $129k up 8% from previous
- West - $238k up almost 22%
- South - $150k up over 9%
- Northeast- $238 up about 8%
These prices set our baseline for evaluating a dream home. U.S. salary average is roughly $43,000 from the Bureau of Labor Statistics (BLS) though these statistics do not factor in how many people are unemployed or underemployed. Even considering the variances in salaries depending on which region we are in, it seems that those living in the West and the Northeast are more likely to fear their mortgage payment each month. These average values for homes and for salaries reveal many Americans are stretched thin if they are trying to buy their home on one income.
Buying our dream home will require two positive factors working together. First, we need to buy our very own Monticello smart. Second, we need to work the financial arrangements in such a way that we can afford a few champagne parties, keep the lights on, and not fear the 1st of every month.
Let's say our dream home lies far outside what we think we could normally afford. If we earn a combined income of an above average amount in the $120k range, or two $60k earners, our 25% guideline above limits us to a mortgage of roughly $2800 per month. With today's low mortgage rates, we could be serving tea to our envious cousins in a nearly $500k home. We are knocking on dream abode territory in the South and Midwest, but still well within normal prices for the loftier Northeast and West regions.
The twist comes with our first key strategy: buy smart. Much like sharp shoppers do with clothing, we will choose the same route for buying our home. Rather than go directly into Versace to buy those shoes we might die without, we will choose instead to get them from Century 21 (for those not in New York City, this store is famous for selling primo designer items at 50-75% discounts). For home buying, we will use this same approach on the front end.
Here are some key resources and techniques for finding discounted gems.
1. Almost all markets - red hot and dead in the water - have homes that are either foreclosed, owned by the bank, or ready for a short sale. The best way to find these discounted dream level homes is to view the listings from banks servicing your area.
These are a few of the major ones:
- Premiere Asset Services with http://ww.foreclosure.com
- Keystone Asset Management - http://www.keystonebest.com
- Department of the Treasury - for homes taken in tax cases at http://www.treasury.gov/auctions/treasury/rp/
- Real Estate Disposition Corporation -http://www.auction.com
- Bid4Assets - http://www.bid4assets.com
- Realty Trac - realtytrac.com
2. When the market is moving quickly with homes selling in 30 days or less, we need to act quickly for access to the best deals. Many areas still have homes available over 90 days on the market. Banks will often reduce the listing prices, already heavily discounted off peak pricing, 7% or more per month. When we finally select a home, we can expect as much as a 25% discount off listing prices so long as we negotiate well with the holding company.
3. Tighten up our credit before applying for a mortgage. By reducing our installment debts across the board including credit cards, car loans, possibly student loans, etc. we take a larger jump in ability to get a mortgage than the numbers might suggest. Simply paying off a $2000 loan before applying for a $600,000 one, can be a make or break step. The lending companies see that there are installment debts, or that there are none, sending the application into the approval or rejection pile depending on the answer.
4. We have the option of buying a "pre-dream" heavily discounted home, living in it for a year or two, then flipping it, and using the outsized profit for leveraging us into our truly ideal situation. For example, with a location like Phoenix seeing home price gains of 20% plus per year, we can buy a discounted property at say, $350K for a previously valued $500k home, then sell it for $450k+ (about a 23% increase) in a year or two. We will then clear at least $90 for making a major down payment on our destiny dwelling. This is the way our parents typically obtained their final and most prominent home. It is so easy, and so financially sound, that we used to know it by the affectionate term "trading up."
The key is, we must have this as the plan and move fast. Selling after 5-7 years may be too late. Get in early. Buy smart. Sell at a peak, and ride the cash into our accommodation that we will have earned through more than hard work. We will have strategized our way towards making our visions a reality.
5. With the above steps in mind, we can be in an enviable position. Our home will be nearly 25% more home than we would have thought was possible, either in value, size, location or all of these positive features. Our mortgage payments will be well within our ability to meet the payments. There is one step though, we need to meet head on, early on.
We need to confirm with the taxing authorities that our home is charged at the lowest possible rate, or else we will be on the edge of trouble. Our actual sales price, along with fire sale homes in the area must be presented to the assessment agency or else they will positively ignore these realistic figures and go with the much higher standard transactions. This difference can mean hundreds of dollars per month in property tax discounts.
Using these strategies, we can all get happily involved in that magazine cover hacienda we have our heart set on. Satisfying our hearts desire, can also be a smart financial move, as long as we use the strategies for getting the most real estate, without getting out of our comfort zone. After all, being comfortable in our home, financially or otherwise, is really what our dream is all about.