Exceeding your budget

There’s a popular television show depicting the home buying process, where we get to watch home buyers look at different properties with their Realtor. There’s plenty of conversation about “fixer uppers” and “turn key” properties and the pros and cons of each. One of the issues that comes up is about exceeding the buyer’s budget. What would that look like in real life?

On TV many families are shopping for homes in excess of $400,000, but for our area let’s use a $250,000 budget. We’re assuming the buyer has been pre-qualified for their financing in advance, using maximum financing with a conventional loan and no mortgage insurance, at best current market rates.

The loan officer told them to expect a monthly payment of about $1580, spending just over $16,000 to acquire a house costing $250,000. Friendly Realtor shows them a fully remodeled house listed at $275,000, acknowledging that this exceeds their budget. What you don’t get to hear is the details: The higher-priced house might cost more like $1738 per month and need $18,000 to close. Does the price and cash difference exceed their monthly budget or their savings account?

What if they fall in love with a $300,000 house instead? Now the payment rises to about $1896 per month, and about $19,000 cash to close. Maybe it’s do-able for this family, and maybe not. The show’s voice over doesn’t disclose this part of their decision making.

On the other hand, what if the buyer bought a “fixer upper” for less? A recent episode showed a buyer saying he would fix the house and “build some sweat equity.” Not so fast, that may not make much financial sense. If now we’re talking about buying a house for $210,000 and putting $40,000 of work and upgrades in later, the payment is around $1327 per month with about $14,000 cash to close – PLUS the $40,000 cash needed for upgrades. This buyer is spending $54,000 to have a lesser payment of about $250 per month. And remember, cost does not equal value: He is not assured that his choice of $40,000 upgrades will result in a dollar-for-dollar increase in value.

It was hard for me to sit through all the conjecture shown on the program without putting a pencil to it for a sense of what is real.

Before you get too excited about making an offer on your next home, make sure you are working with a Realtor and a local mortgage advisor who can run actual scenarios so you have the data you need to make the best decision for your family.

Tammy Engel is your local Mortgage Advisor and has been working for your best interest since 1990.

Contact her at 661/822-7325 for purchase, refinance, and reverse mortgage.