Why You Shouldn’t Buy a House on a “Shoe String”

Now is a great time to buy a house—interest rates are at all time lows, and house prices have fallen significantly. In some markets you can get a house at 2005 prices with 2012 interest rates, which makes now a special time in the housing market. But you do have to be a bit careful in how you do it.

There was a time—and not so long ago—when the standard advice for the would-be home owner was buy the most house you can afford, and your finances will grow into it. That worked for generations, people bought homes and then rode the career and income ladder up even until the point where they could more than afford their home. And then it was time to trade up.

A few things have changed with the housing meltdown of the past few years and now it’s best to buy a home for which you are well qualified. By well qualified, I mean one that you’ll be able to afford even if you face a financial reversal or two during the course of owning your new home.

There are a few realities that make this shift in housing strategy necessary.

Property values are bouncing

There’s something we know now that we didn’t know just a few years ago: property values can go down as well as up! This factor alone has major implications for homeowners.

Maximum financing should be avoided. While it’s true that saving for a down payment is a major hurdle, especially for first time homebuyers, the hoped for zero to five percent down program simply doesn’t contain enough margin should the value of your house fall. For example, if you put five percent down on your home, and the house declines by five percent two years later, your equity will be gone. If it declines by 10%, you will be in a negative equity position.

Since there’s no way to know if a property will increase in value, a larger down payment will be the best protection you can have.

Jobs and careers aren’t as certain as they used to be

There are some career fields that are continuing to grow in both job opportunities and incomes, but that growth is hardly uniform. The potential of earning more money in the future is not guaranteed in many fields today and that makes a strong case for buying less house than you can afford.

One of the best ways to do this is to prequalify for a mortgage and then come up with a monthly housing payment that you will be able to afford comfortably even if you lost some of your income. This would provide breathing room if you lose your job and have to take one at lower pay.

It’s not as easy to sell a house as it once was

One thing homeowners have always been able to count on in the event of a financial catastrophe was the ability to sell their home, and usually to do so at a considerable profit. No more.

With declines in property values, as well as the weight of foreclosures, selling a house is no longer as easy as it was in the past, and selling it for more than you paid for it is even more in doubt. Buying with a higher down payment and buying less house than you can afford can keep you out of being in a situation where you might be forced to sell your house at a loss because of long-term unemployment or some other financial issue.

Monitor your credit regularly—refinancing has gotten tougher

Most homeowners will want to refinance at some point in the future, whether it’s to get a better interest rate, consolidate multiple mortgages or to take cash out for business purposes or to pay for a child’s education. But because of all of the above, refinancing is no longer as easy as it used to be either. Credit standards have tightened, so much so that you may not be able to get a new loan on the home you already own.

Once you’re in your home, you need to keep your credit super clean and to make sure your credit report is free from errors and derogatory information. The best way to do this is by monitoring your credit report and credit scores. Any future lender will rely on these heavily in determining whether or not to approve your refinance.

Many homeowners don’t check their credit until they apply for a refinance, but if there’s any negative information it may already be too late to fix it. There are some credit issues that can be repaired in a week or so, but others can take months. By monitoring your credit you’ll have the time you need to handle any credit repair before anything important hangs in the balance. There’s a real window of opportunity in the housing market right now—play it right and you could be one of the long-term winners.

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.