The Importance of Honesty in the Homebuying Process
There’s that cliché line of “honesty is always the best policy,” and to me it couldn’t ring truer when it comes to the early stages of the home buying process, and most importantly the pre-approval process. It is critical to be honest with the loan officer in those early conversations about debts, wages, and relationships, because once we get under contract, I can almost guarantee they will find out one way or another.
I think many of us wish we made more money, myself included, but there is nothing to be ashamed of when being honest about how much you can afford. By being honest about this up front it allows us to see exactly where we should go up or down in budget, and how things like insurance and taxes will impact that monthly mortgage premium. Depending on where you are in your career and life, many of us on the younger side are hopefully seeing our salary or wages increase each year, which is good in the sense that if you can afford your monthly mortgage payment at your current rate as your wages increase it will hopefully become easier to pay in the future and allow you to pay more towards the principal, and build more equity in your home. This does not mean you should be stretching yourself thin to pay it now, but rather stay at a comfortable payment amount so that you can continue to afford your regular expenses and hobbies.
I have seen several transactions fall apart when underwriting begins to question where funds come from and how things like shift premiums, overtime and overall job history or stability can make or break a sale. In many cases it is not a good idea to consider shift premiums and overtime when calculating your wages, because those things are not permanent. Prior to working in real estate, I worked in human resources and recruiting, and it was very eye opening how some competitors would label or try to sway applicants with high wages in offers, but in reality they were factoring in things like shift premiums on certain days and hours, uniform stipends and even pick up bonuses.
It is okay to not be ready to buy a house, there will be houses for sale when you are ready. It is the responsible thing to do to set yourself up for home buying success by working on improvements in your credit score if needed, have funds saved for down payment and costs, as well as having an emergency fund and savings account. According to Anuj Nayar’s article The Reality Behind The $400 Emergency Expense Number from Forbes, “New data found that more than half of U.S. consumers were living paycheck to paycheck in May 2022, a 4 percentage-point increase from May 2021. Also, three in ten consumers making $250K or more annually (the top 5% of income earners in the country) are living paycheck to paycheck. Additionally, half of consumers living paycheck to paycheck say their salary only covers basic expenses and is one reason behind their financial woes, and 65% of paycheck-to-paycheck consumers said they have experienced a financially stressful event in the past three years. (2022)”
If you are living paycheck to paycheck it can feel like an uphill battle with little light at the end of the tunnel but buying a house when living paycheck to paycheck could be a recipe for disaster from a financial perspective as well as a mental health perspective. I want all my clients to celebrate their success of their purchase, but if the money isn’t there it can create more anxiety and distress if something goes wrong even a small thing. Forbes’ article also states, “Since 2013, the report [Economic Well-Being of U.S. Households from the Federal Reserve System] has asked consumers if they could cover a hypothetical emergency expense of $400, and the striking findings have been widely covered in news media when talking about the financial well-being of Americans. One in 9 even reported they wouldn’t be able to cover a $400 emergency expense whatsoever. But nine years later, is it worth asking, why the Federal Reserve continues to use $400 as a base number when our economy has completely turned on its head?... If you take inflation into consideration, a $400 expense in 2000 would be equivalent to a $702.16 expense in 2022 according to the CPI Inflation Calculator.”Posted by Ariel Christy on