Biggest Lies and Myths for buying a house.
What are some of the biggest lies or the biggest myths when it comes to buying a home, especially in 2023? If you’re a first time home buyer, you’re probably wondering, in the last three, four years, prices have gone up very high. Homes are at its peak, interest rates are very high.They seem to be at peak, used to be 3% about a year ago. They’re like 7% or just near 7% or under right now. Inflation is very high, almost 8%, and homes are sitting on the market. It’s taking them longer to sell. There are no more bidding wars.
So the question is, should you buy now or should you not buy? What is the fact? What are the myths? Let’s look at those.
The truth of the matter is, when is a good time to buy? I always say the best time to buy is when you are ready, willing and able to buy. That means you have the down payment, what is necessary, you are qualified and the banks are willing to give you the loan. And you are mentally, psychologically and physically, in the sense ready to move. Maybe it’s a job transfer, or you want to move closer to your parents house, or you want to move to a newer area. So the best time to buy is when you are willing, able and ready to buy. But let’s look beyond that. Let’s look at the four myths right now, or three lies to consider for you to buy a house, should I buy in 2023 or should I wait? So here are the four myths.
1.) I’m sure you’ve heard this, you buy when the prices is low. Well, the question is when do you know the prices are low? Yes, you want to buy low and sell high. That’s the real estate technique. But when it comes to buying a house, when you’re ready to move, when your job transfer is there, medical issues are there and you have to move. Can you move right now? Do you want to wait for the market to be at the lowest? I’ll give an example.
Prices have been going up since 2010-2011. They have gone up for the first time in history for ten years in a row they’ve gone up. I’ve had some friends in 2017, 2018 tell me that “‘ll buy when the prices go low.” Guess what happened after 2017, 2018? They did not buy. They bought it in 2022, paid almost double the price. Luckily they got a 3% interest rate.So it kind of helped out. But these clients, my friends that I know them very well, told them over and over again, buy when you are ready, chased the market, waiting for the prices to go low. And it never went low. They waited from 2016 to 2017, 2017 to 2018, prices, as you know, skyrocketed. They ended up paying 40%-50% more for the same house. Like I said, you cannot chase the market. So you buy when you are ready.
You never know when the prices are going to be low. But the other thing to remember is if you buy high, let’s say you buy right now. In fact, I just sold a house to two of my friends and they bought in 2022, August, in 2022, September and October, and I have two in escrow. These buyers are not saying I’m buying low. They know what they are doing. They know that if they’re going to stay in that house for a long period of time, which they are maybe five years, six years, seven years, they know that the prices eventually will go up.
Statistically and historically, if you look at the last 30, 40, 50 years, prices of homes in USA have gone up 4% per year on average. That means that if you buy a house right now, even though it’s high, chances are and historically and statistically, your value of your home in five to ten years will go up.
So yes, you want to buy low, but you cannot time the market. You buy when you are ready. So never believe that it’s always best to buy the lowest time, because you never know when the lowest time was. Same thing, we don’t know if you’re a seller, they may time it, let’s sell it the highest price. They never knew when the highest prices were, statistically, or what happened last year in spring. It seems like the prices peaked in the spring and then they came down. So even the sellers cannot time the market when to sell. Similarly, the buyers cannot time exactly when the price is at its lowest. So, again, repeating myself, you buy when you are ready, willing and able to.
2.) If you’re renting, people tell you that you should not rent, you should buy a house. It’s very true that if you’re renting versus if you’re buying, buyers have a net worth of 40 times more than the renters. That does not mean that if you’re a renter that you should buy right now, or maybe you cannot afford to buy, it’s okay for you to keep renting. Maybe your lifestyle is such that you don’t want to own a home. You don’t want to get stuck in one place for 5, 10, 15 years. Maybe you have the kind of job that you have to travel a lot every six months or every year you have to move, then that lifestyle, renting lifestyle is the correct lifestyle for you.
Maybe you want to buy a house, but you want to keep renting right now for the next 2-5 years because you have some debts to pay, or you have a medical issue, or you could not keep a job and you keep finding a new job. You don’t have the down payment. So it’s very true that if you like to rent. If you prefer to rent, it is okay to rent. Keep renting until you are ready. Don’t be forced into buying a house because everybody says buy a house, buy a house.
And yes, it is true that buying a house has a lot of benefits, like improving your net worth, savings on taxes, having stability, but it has a lot of disadvantages. Like I mentioned earlier, you may be a mobile person. You don’t want to get stuck. You want to find the right house, the right area, the right location at the right time to move. And that’s perfectly fine. So renting is not bad at all. If that’s what you want, it’s a perfect thing for you to do. Don’t get pushed into buying a house just because your friends and family and peers are telling you to buy. Wait, enjoy your rental, when you are ready, feel free to purchase a home. Feel free to call me. I’ll be glad to give you some information and insights, so hope that helps.
3.) When you are pre qualified by the lender or the bank, you are limited to what you can buy.
So there’s two sides for this. And here’s how I can explain to you. Let’s say you talk to a lender and of course you’ve heard from a lot of realtors, including myself. I tell the buyers the first thing you should do to prepare to buy a house is talk to a lender. And that is the right “advice”. Talk to your lender first so you know what your limitations are on the high end or the low end, on how much you can buy.
At the same time, there is some myth or some lie about how much you can buy. I’ll give an example.
Let’s say you are qualified by your lender and he’s saying, okay Mike, you can buy a house for $500,000. So I go out and look for a house for $500,000. Whatever down payment I put in, maybe it’s 5% down or 20% down. And then I find out after I move into the house and that has happened to a lot of my clients, they feel stretched. Buy a house for $500,000. Then they realize that they’re really stretching it. What do I mean by that?
Well, if you buy a house for $500,000 and let’s say you put $100,000 down, you have a loan of $400,000. So obviously you have a mortgage payment. That’s what the lenders factor you in. When they say you buy a house in your qualification, they look at your debts that you have currently, your credit cards, your auto payments, your student loans, whatever you have. And they look at your gross income and based on your gross income and your debts currently showing, not the amount of debts, just the monthly payments. Based on that, they tell you you can qualify up to $500,000 or a million dollars or whatever.
One thing the buyers don’t look at, including the lenders don’t look at or may not tell you about, is that you have personal expenses. Let’s say my mortgage payment was $3,000 for that $400,000 loan amount that I bought. And I make, let’s say as an example, $10,000 a month. I may feel comfortable paying $3,000 a month on a $10,000 gross income. Usually the rule of thumb is your mortgage payment should be one third of your income.
But one thing that a lot of the buyers overlook and a lot of lenders overlook is you have personal expenses. Number one, you have income taxes. Maybe you’re in a high tax bracket. You have personal expenses, grocery bills, internet bills, cable bills, utility bills, association. I have association of $300 a month. The lenders don’t count that. I have other expenses. Maybe I’m traveling an hour a day. So my gas bill is $500 a month. I support my mom, I support my sister, or I support my grandmother. And I may have a $300 additional expense. All these personal expenses which the lenders don’t look at will add up to my $3,000 a month payment and really squeeze me in purchasing that $500,000 house.
So the one negative side about lenders is that you may be buying more house, but on the other side it could work the other way. You could buy more of a house instead of $500,000, you could be able to buy a $700,000 house. So it works both ways. And how can that be possible where a lender qualifies you for $500,000 but you can buy a $600,000 or a $700,000 house? It’s not very accurate that the lender qualified me or any buyer for $500,000. So let me give you an example.
I work with a lot of business investors and business people and I sell a lot of commercial and investment properties. And a lot of these business people have complicated tax returns. They have K ones and schedule fees and a lot of the expenses of businesses they put on their tax returns. So even though their expenses show high, their income shows they can afford more. And I’ve sold many homes where the buyers were qualified for a million dollars and they ended up buying a 1.2, 1.3 home. One of the ways a key example of doing this is there are loans that are called easy dock loans or no dock loans.
In fact, I just purchased a property last year. And because I filed my tax returns as business and I have business expenses, my lender had told me that the investment property I could buy at a certain amount. But we ended up buying at a higher amount because we put 25% down, we got an easy dock loan, and all these debt ratios did not count at all. So we ended up buying more of a house than what the lender told us to buy.
So the myth that you buy what your lenders suggest to you may not be true on an individual basis. You could buy much lower to be more comfortable and not be choked with your house payments and your personal expenses. Or you could buy a bigger house or a bigger property, more comfortable property, maybe with a pool or a view. More than what the lender suggests. So let’s look at the myth number four.
4.) When buying a home you have to put as much as 20% down. That’s absolutely not true. It so happens a lot of the buyers that I work with, I always recommend them to put 20% down because most of the buyers I work with are capable of putting 20% down. The advantage of putting 20% down is that if you put 20% down payment, you do not have any PMI, which is a private mortgage insurance. Once you put less than 20% down, there’s an additional cost of the PMI. But you can buy a house with 5% down, 10% down, 15% down, 50% down. You can also buy a loan for as low as 3% or three and a half percent down, which is the government loan, the FHA loan, so you don’t have to put 20% down. And in fact, there are loans out there that are 0% down, especially the VA loans. If you’re a VA, you can put 0% down and have zero money because the sellers can pay your down payment or help you with the closing cost, depending on what VA loan that you get.
So if you don’t have 20% down, don’t sweat it. If you have 5% down or 10% down, or if you want to buy a house and you want to start collecting your down payment or saving for your downpayment, don’t sweat to get to 20%. Maybe you can go with as little as 5% down on a $500,000 house. At 5% down, you just need $25,000 down payment and maybe another five to $10,000 in closing cost.
So it’s not very difficult to buy a house if you set your mind to it, if you get all the facts, if you talk to a professional, and if you’re ready to buy a house. Buying a house is very easy to buy. It’s always a great time to buy a house. Of course, if you are willing and able and ready to buy. And there’s always advantages like taxes and other benefits.