The new parent's guide to house hunting

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Baby makes three and demands a whole lot more space. Keep some tips in mind when looking for a home.

Whoever said pending parenthood is a time of simple joy?
For expectant parents, there's nothing more stressful than trying to figure out just how to make room for baby as you make the transition from freewheeling couple to homebound Mom and Dad.
With the housing market on a tear, couples are opting to trade in the urban apartments for suburban life. And a baby on the way is proving to be a big motivator for couples to take the plunge into the real estate market, said Linda Murray, executive editor of BabyCenter.com and co-author of The BabyCenter Essential Guide to Pregnancy and Birth.
Murray said that expectant couples are twice as likely to buy a home than couples without children. If you're in that group, here are some things to keep in mind to help you make the best choice in homes without breaking the bank.
Buy within your budget
Young couples tend to make the mistake of buying overpriced homes that are more similar in style to those of their well-established parents, rather than looking for a more affordable model.
"Chief among the culprits of an unbalanced budget is a house payment that is far too much to handle," said Bryan Clintsman, a certified financial planner at Clintsman Financial Planning. "I am the one that has to sit down with these couples later to pick up the pieces of being house-rich and cash-poor."
Financial advisors say that homebuyers should try to keep mortgage payments below 28 percent of gross income. Your debt, which may include items such as student loans, car loans and credit cards shouldn't exceed 36 percent of gross income.
And new parents may have even less wiggle room that others. Remember, babies are expensive. A good rule of thumb is to factor in about $6,000 to $12,000 a year as the cost of a new baby, said Elaine Scoggins, president of Scoggins Financial.
In addition, new parents should be conservative with their income estimates. It's not uncommon for a mother or father to quit work or scale back their hours after a baby is born, even if that wasn't the original plan. Try to calculate a mortgage that would be manageable on one income if circumstances change.
Pick the right mortgage
That 5/1 ARM (which means its initial interest rate adjusts after five years and can change once a year after that) certainly sounds cheaper when you compare the costs of the interest rate on your mortgage to a 30-year fixed mortgage. The average interest rate for a 5/1 ARM is currently about 4.91 percent while a 30-year can run about 5.5 percent, according to Bankrate.com.
But beware the trap: a 5/1 ARM means that at the end of the 5-year period, your monthly payment will reflect whatever the current rate is and economists expect rates to continue to rise. New parents have enough expenses without worrying about a sudden spike in mortgage payments when Junior turns 5.
Avoid interest-only loans if you're considering this option to afford a home that would otherwise be outside your budget. If circumstances change, such as the loss of one income, you may not be able to afford the payments when the interest-only period ends and the mortgage payment spikes up significantly.
Avoid the bells and whistles
It's tempting to buy a house with granite counter-tops, marble tiles and a cute little rock pond in the backyard. But is it really necessary?
Instead new parents' primary focus should be the right amount of space and the right neighborhood to start a family -- better to pay up for a good school system that a sub-zero fridge.
In the home, try to avoid physical dangers like steep stairs, porches and decks with large drop offs or passageways with only a railing on either side. And invest in some serious baby-proofing if the home has some of these dangers.
Smaller may not be better
Sure, it's tempting to move your new family into a starter home -- one that is usually smaller, may need a little more renovation and is generally less expensive than a large single-family home. For those on a tight budget, it could be ideal. But if your family suddenly expands further, starter homes may prove to be too small, said Clintsman.
Consider how many children you want in the future and how soon after the first child when deciding on the size of a home. If you consider that, on average, it costs about 10 percent of the home value to pay closing costs of buying and selling a house ? not to mention the cost of hiring moving companies and buying furniture for a larger space ? frequent moving around can take its toll on your wallet.


Desperate house buyers increase foreclosure risk

The meteoric rise in home prices has been accompanied by a sharp shrinkage in the size of down payments made by cash-strapped buyers, a trend that could portend a spike in future foreclosures, new research shows.Nearly four out of 10 (38.1%) home buyers who bought houses in the first half of 2005 put down less than 5% of the purchase price, up from 30.6% in 2000, according to a study released Tuesday by SMR Research, a Hackettstown, N.J., firm that tracks mortgage debt. Nearly half (49.9%) of buyers put down less than 10%, up from 44.8% in 2000.
Another potential red flag is the growing use of so-called piggyback loans.
Traditionally, home buyers who did not come up with a 20% down payment had to pay an added cost each month for private mortgage insurance. But recently, more strapped borrowers are taking out two loans - one for 80% of the purchase price and a second, or piggyback, loan in the form of a line of credit or home equity loan. So far this year, nearly half (48.2%) of buyers used piggybacks, up sharply from 19.9% in 2001.
The statistics suggest that many home buyers are stretching their budgets well beyond their means. The risk is that recent buyers have such minuscule equity in their homes that if prices fall, they could owe more on their mortgages than their homes are worth.
The National Association of Realtors says the median price of an existing home rose 13.6% to $208,500 from the second quarter of 2004 to the second quarter of 2005.
"As home prices rise, people can't afford them," says Stuart Feldstein, president of SMR. The study, he adds, highlights the fact that most people haven't saved enough money to buy ever-more-expensive homes. Home buyers are "using much more leverage," he says.
Americans' ability to take on massive mortgage debt has been fueled by the availability of "exotic" mortgages, such as interest-only loans and adjustable-rate mortgages that provide borrowers with a lower monthly payment for a short period of time, says Dean Baker, co-director at the Center for Economic and Policy Research.
"Home prices are going through the roof, forcing people to turn to exotic loans and unorthodox financing," says Baker. "These people have no room for error."
SMR warned that the risk of foreclosures rises when borrowers take out loans in excess of 80% of a home's purchase price. While rising prices have reduced some of that risk, the "future foreclosure risk is rising," SMR claims.