Since 2000, homeownership rates in the U.S. have hovered around 66% to 67% of the population. In 1900, less than half of Americans owned their own home. The biggest surge in home buying came after World War II, when many young families were encouraged to buy a "starter home". (To learn more, see Top Tips For First-Time Home Buyers.)
IN PICTURES: Financing For First-Time Homebuyers

Attitudes about how to buy a home have fluctuated as much as interest rates during the decades since World War II, and eventually many first-time homebuyers were encouraged to "buy big", in order to stretch their budgets as much as possible, and buy the home they wanted to live in forever. Given the high level of foreclosures and the loss of value in many homes, today's buyers are more wary of taking on a home they cannot afford, but many are still tempted to make their first home purchase their dream home rather than their starter home.

A recent Coldwell Banker Real Estate Brokerage survey of their brokers revealed that while affordability was the number one concern of first-time homebuyers, 81% of those buyers consider move-in conditions very important when moving into a home. Only 7% were considering buying a fixer-upper.

Jim Gillespie, president and CEO of Coldwell Banker was quoted as part of the survey, saying, "In the past, first-time homebuyers were willing to purchase older, more basic houses in an effort to save money and break into homeownership. It is important for first-time homebuyers to remember that by considering a fixer-upper for their first home purchase, they can build equity over time and later move up and into their second-stage home that better reflects their expectations." (Read more, in 4 Types Of Home Renovation: Which Ones Boost Value?)

The Economy and Your Home
Personal finance writer Liz Pulliam Weston describes four economic changes that should discourage buyers from overspending on their house payment:

  1. Inflation
    Rising prices, while hard on the household budget, usually came along with substantial annual raises. These days, homebuyers cannot count on a significant raise to make their housing payments easier to handle.

  2. Two-Income Couples
    Weston says that when more families had a single wage earner, the other spouse could go to work to pay for the house if they were in financial trouble. Today, most households have two workers and that double-income is needed to make the mortgage payment. Consider trying to base your budget on one income or perhaps one and one-half an income to make sure your housing payment will still be affordable if one spouse stops working.

  3. Lenders
    Thirty years ago, it was very difficult to qualify for a loan for more than was easily affordable, but as lending practices changed, mortgages qualifications became looser. Standards have tightened today, but lenders will always give borrowers the maximum amount they qualify for - not necessarily what they should spend.

  4. Retirement
    Thirty years ago and more, most people had their retirement covered by a pension and could count on Social Security. Today, retirement savings are more typically individually funded in 401(k)s and IRAs that come directly from your budget.

    Each of these changes suggests that today's homebuyers should be shrinking their housing budget rather than expanding it, making sure that they can comfortably keep up with their payments, pay down their principal and build equity in their property.

IN PICTURES: 7 Smart Steps Every New Homeowner Should Take

Calculating Your Housing Budget
Lenders will qualify you for a loan based on your credit score, your debt-to-income ratio, income and assets and your employment history. But each potential buyer should do their own calculation to determine their comfort level with a budget. While lenders these days generally prefer to limit housing expenses (principal, interest, taxes and homeowners insurance) to 28% of the borrowers' monthly gross income, each individual should think about their own spending habits.

A lot depends on your other debts and anticipated income and expenses. Most lenders prefer to keep total debt to income (including all the minimum payments on revolving debt or other loans such as auto or student loans) to less than 36% of your gross income; although under some circumstances this can rise to 40% or even 45%. (To learn more, see Too Much Debt For A Mortgage?)

Make sure to budget about 1% to 3% of the home value for future repairs and maintenance, since those costs can quickly derail your budget.

Most homeowners should plan to stay in their home for five to seven years, so consider what may change in those years. If you plan to have children and may want to have one parent work less, your income could drop. If you enjoy golf or travel or skiing, you need to factor that into your budget or decide if you are willing to reduce your spending in that area. If you work on commission or overtime or as a freelancer, make sure you base your budget on a low-end year rather than a high-earning year in case your income drops. On the other hand, you can consider increasing your housing spending if your retirement is fully funded, you are debt-free and you anticipate a guaranteed increase in income.

The Bottom Line
While no one can predict with accuracy whether or by how much home values will increase in future years, purchasing a home you can afford and building equity by paying down the principal are the surest ways to get started climbing the property ladder. (For pitfalls to avoid, check out the 10 Worst First-Time Homebuyer Mistakes.)

Find out what happened in financial news this week, with Water Cooler Finance: The New iPod And The Roller Coaster Market.

Related Articles
  1. Credit & Loans

    Understanding Home-Equity Loan Rates

    Shopping is the most important part of getting a home-equity loan. You're going to have to live with the terms for a long time.
  2. Insurance

    5 Ways to Lower Life Insurance Premiums

    Learn several effective methods for lowering life insurance premiums. These include quitting smoking and considering term life insurance.
  3. Budgeting

    The 7 Best Ways to Get Out of Debt

    Obtain information on how to put together and execute a plan to get out of debt, including the various steps and methods people use to become debt-free.
  4. Credit & Loans

    5 Signs a Reverse Mortgage Is a Bad Idea

    Here are the key situations when you should probably pass on this type of home loan.
  5. Credit & Loans

    5 Signs a Reverse Mortgage Is a Good Idea

    If these five criteria describe your situation, a reverse mortgage might be a good idea for you.
  6. Home & Auto

    Understanding Rent-to-Own Contracts

    They can work for you or against you. Here's how to negotiate a fair one.
  7. Home & Auto

    Avoiding the 5 Most Common Rent-to-Own Mistakes

    Pitfalls that a prospective tenant-buyer could encounter on the road to purchase – and how not to stumble into them.
  8. Home & Auto

    Renting vs. Owning: Which is Better for You?

    Despite the conventional wisdom, renting might make more financial sense than you think.
  9. Credit & Loans

    Guidelines for FHA Reverse Mortgages

    FHA guidelines protect borrowers from major mistakes, prevent lenders from taking advantage of borrowers and encourage lenders to offer reverse mortgages.
  10. Home & Auto

    When Are Rent-to-Own Homes a Good Idea?

    Lease now and pay later can work – for a select few.
RELATED TERMS
  1. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  2. Equity

    The value of an asset less the value of all liabilities on that ...
  3. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  4. Chattel Mortgage Non-Filing Insurance

    An insurance policy covering losses that result from a policyholder ...
  5. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...
  6. Construction Loan

    A short-term loan used to finance the building of a home or another ...
RELATED FAQS
  1. Can I take my 401(k) to buy a house?

    Once you reach 59.5, you can use the funds in your 401(k) retirement savings account to buy a house or any other expense ... Read Full Answer >>
  2. Can I take my 401(k) to buy a house for my children?

    Under the standard regulations for 401(k) retirement savings plans, you may elect to withdraw funds from your 401(k) for ... Read Full Answer >>
  3. How is market value determined in the real estate market?

    Anyone who has ever tried to purchase or sell a home has probably heard a lot about the property's fair market value, or ... Read Full Answer >>
  4. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  5. What is the range of deductibles offered with various health insurance plans?

    A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
  6. How do I know how much of my income should be discretionary?

    While there is no hard rule for how much of a person's income should be discretionary, Inc. magazine points out that it would ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!