Sidestep home shopper’s regret
By Erik J. Martin
W
hen in doubt, a smart investigator follows a proven credo: To find the truth, follow the money trail. So in trying to understand why 65% of home buyers backed out of purchasing a home over the past year – according to the results of a recent survey conducted by Lombardo Homes – it’s helpful to follow the breadcrumbs back to other insightful data. Kris Lindahl, CEO/ founder of Kris Lindahl Real Estate in Denver, was particularly perturbed by that 2:1 abort ratio. But he’s convinced that a big reason why many of these buyer wannabes got cold feet is found in a fresh report by Opendoor, which reveals that only 40 percent of prospective purchasers initiate the buying process by estimating what April 16, 2021
they can afford. “Many potential buyers begin without having the right information,” he says. “It’s easy to fill out a form with an online lender and be told you are prequalified without really being aware of what that translates to in terms of a monthly payment. There are factors that buyers may not be considering prior to looking at homes.” Put another way, lots of home shoppers lack necessary financial literacy, according to Kris Lippi, real estate broker/CEO of ISoldMyHouse in Hartford, Connecticut. “Too many prospective buyers back out of purchasing a home because the amount they thought was enough isn’t really enough, considering today’s market prices. These buyers need to be educated more when it comes to the cost of purchasing and eventually owning a home,” she suggests.
Budget properly before hunting for a home Julie Aragon, a Los Angeles-based mortgage broker, explains that homeowner prospects frequently experience sudden anxiety when they begin closely reviewing their financial picture and soon-to-be budget associated with their new home purchase. “Often, people become fixated specifically on their mortgage payment and overlook the other expenses involved, including taxes, insurance, and maintenance,” notes Aragon. “Commonly, people are stunned when they eventually calculate how certain types of spending accumulate at month’s end. Acquiring this knowledge and information before the transaction completes is often an eyeopening reality that can force a would-be buyer to
postpone what might be a financially irresponsible home purchase. And that’s actually a good thing in the long-term.” In other words, even though that 65% back-out rate is alarmingly high, at least many of these potential buyers eventually crunched the true numbers and came to their senses before making a purchase that would have led to major regret and financial struggles. Still, many of these folks could have saved a lot of time and prevented much frustration if they budgeted properly early on, the experts agree. “There’s no use wasting time going shopping and falling in love with a house that you eventually learn is beyond your budget. If you do not financially forecast properly, odds
RE-Weekly
are you might lose your chance of winning bids for a house you can afford because you devoted time looking at houses you are less likely to close on,” says Lippi. Suzanne Hollander, attorney and real estate professor at Florida International University in Miami, recommends starting the process by obtaining a mortgage preapproval letter from a lender before looking at properties and working closely with the lender to create an accurate budget. “This preapproval letter confirms the maximum purchase price you can afford to spend on the property and helps you set realistic parameters for the house search,” Hollander says. “During this preapproval phase, the lender will ask you detailed questions regarding your income, debt, and liabilities and educate you about the amount of money needed
to pay the mortgage and other expenses.” To help budget properly, follow a general rule of thumb: The maximum amount of your monthly gross income you should allocate toward housing expenses is 28%. Aragon says this can be calculated by using the following factors: n Principal loan amount plus interest n Real estate property taxes n Homeowners insurance premiums n Private mortgage insurance, if applicable – usually required by the lender if you lack a 20% down payment n Homeowners association dues, if applicable – often applies to condos or housing developments n Maintenance, repairs, and upgrades to your home. “Additionally, calculate non-housing expenses like food, utilities, vehicle costs, existing debts from credit cards, student loans, and car loans, retirement savings, and short-term savings. That way, you can see what’s left for your potential home purchase and whether that tracks with the 28% recommended maximum,” says Aragon. While budgeting, think about expenses you can eliminate to help make a home purchase a reality. “Things like eating out, Netflix subscriptions, and vacations should all be taken into account,” Lippi adds. 5
