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There are many advantages
to buying a home versus renting one.
Are you ready to be a homeowner?
If you're thinking about buying a home, you probably have
a mental list of the benefits owning a home would bring to
your life. You imagine waking up and falling asleep in your
own home, decorating as you please, or maybe even getting
away from the loud neighbor you hear every evening through
the paper thin walls of your apartment complex. You are ready
to invest your monthly housing expense, instead of giving
it all to your landlord every month.
The desire to own a home has been felt by nearly all Americans.
Owning a home is the American dream. So what's stopping you?
That's a good question, one that should be carefully answered.
It's important that before you buy a home, you understand
the potential impact it will have on your finances and lifestyle.
Listed below are some of the new
responsibilities and added benefits of owning your own home.
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New Responsibilities:
Maintenance - If you've never owned a home
before, you are probably used to calling your landlord when
an appliance breaks down, or something else goes wrong. When
you own your home, you become the landlord. When the dishwasher
stops working, you get to call the repairman and pay for the
repairs. Be prepared to spend more time and money on emergency
and planned repairs on your home.
Disposable Income - When you buy a home,
you can either pay cash or get a mortgage. Most people have
some kind of mortgage on the home they own. To get a mortgage,
you will need a down payment. Saving for a down payment will
take discipline on your part, and possibly some time. And
this is required before you even move into the home! Once
you move in, you will need to continue setting aside money
for repairs, improvements, new appliances, etc.
Monthly Cost - In some cases, your mortgage payment will be
more than your current rental payment. This is especially
true if interest rates happen to be high when you purchase
your home, or if you buy a proportionately larger home than
you are renting. Mortgage payments are typically higher than
rent because besides paying the principal and interest on
your mortgage, you must pay for hazard insurance, property
taxes, and any mortgage insurance that might be required.
Risk - Any investment you make has some
element of risk. Luckily, purchasing a home is on the low
end of the risk spectrum. Since no investment is totally safe,
you will want to do sufficient research before you buy the
home, and continue staying atop of current trends in your
city and neighborhood to verify your investment is doing well.
Insurance and proper maintenance are other ways to protect
your investment.
Liquidity - Buying a home should be considered
a long-term investment. If you plan on moving frequently,
you might not recoup closing costs and fees paid when you
get a mortgage, or the fees paid to a Realtor when you sell
the home. And unlike a mutual fund or stock, you must sell
your home to turn your equity into cash. Selling your home
might take months and relocating to a new residence takes
energy. These are hindrances to accessing the money you invested
and why equity in a home is considered a non-liquid asset.
Benefits:
Pride of Ownership - It is a great feeling
to own your own home. This benefit may be enough to outweigh
any disadvantage previously listed. With your own home, you
feel a sense of stability and community that you probably
didn't feel when you rented. This comes from the fact that
you own a piece of property in a neighborhood along with others
enjoying the same benefits as you.
Investment - Since you are going to have
a housing expense for most of your life, it is definitely
worthwhile to consider investing some of that expense in a
home of your own. For those people who plan on staying in
a home long enough to pay off their mortgage, owning a home
is a forced savings plan.
Appreciation - If your house increases in
value (becomes worth more than you paid for it) you will benefit
from this appreciation. As you continue to pay your mortgage,
and your home appreciates, your equity grows. When you sell
your home, this equity will become dollars in your bank account.
It is important to carefully choose your home so that over
time you will benefit from appreciation, because it is not
necessarily guaranteed.
Tax Savings - Consult your tax advisor for
the specifics of any tax savings you might benefit from with
owning you own home. Usually, some expenses may be tax deductible
such as mortgage interest and property taxes.
If you are ready to take advantage of the benefits of owning
a home and feel you can handle the new responsibilities it
will bring, you will want to take the next step and determine
if you are prepared to qualify for a mortgage.
Are you qualified
to buy a home?
To qualify for a mortgage, you will need to prove to a lender
that you have sufficient income, credit, and down payment
for the home you are trying to buy. In general terms, you
can expect the following requirements by the lender.
Income:
One aspect of qualifying
for a mortgage is often referred to as your "ability
to repay." This means that you can provide evidence that
you receive a certain amount of income sufficient to pay your
current liabilities along with the new mortgage payment. Two
qualifying ratios based on your gross monthly income (income
before taxes or deductions) determine the loan amount for
which you qualify. These ratios vary depending on your lender
and on each individual's situation, but there are some basic
qualifying ratios that you can use to determine if you qualify
for a certain loan amount.
Generally, for a conventional mortgage, your housing expense,
which includes your principal, interest, taxes, and insurance,
should not exceed 28% of your gross monthly income. Your total
monthly expenses, which include your housing expense and any
long-term debt, like car payments, should not exceed 36% of
your gross monthly income. FHA and VA mortgages have different
qualifying ratios. See chart below.
For example, if your gross annual income is $50,000, or $4167
per month, your monthly mortgage payment should not exceed
28% of that number, or $1167. In other words, you would qualify
for a conventional mortgage that requires monthly payments
of $1167. But you have to qualify with all monthly long-term
debt also. If your gross monthly income is $4167, 36% of that
number is $1500. So your total long-term debt along with your
mortgage payment cannot exceed $1500 per month.
Type of Mortgage: Housing Expense Ratio: Total Monthly Expense
Ratio:
Conventional 28% 36%
FHA 29% 41%
VA N/A 41%
You can call a mortgage lender/broker and speak with a loan
representative who can calculate these ratios for you and
provide a loan amount for which you qualify. The lender/broker
will require documentation of the monthly income you receive.
If you are a regular employee, 30 days of pay stubs and W2s
will be required. If you are self-employed, two years' most
recent tax returns along with a profit and loss statement
will be needed.
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Credit:
Another aspect used to determine if you qualify for a mortgage
is referred to as your "willingness to repay." This
takes into consideration your past and present credit history.
Your credit history will demonstrate to a mortgage lender
if you are willing to pay your debts in a satisfactory manner.
Your credit history includes items that may or may not appear
on your credit report. Liabilities like car loans, credit
card debts, and any personal loans will most likely appear
on your credit report. If any of your liabilities at the time
of applying to a mortgage lender do not show up on your credit
report, you will be required to provide evidence of your repayment
history with those accounts. An item that most likely will
not appear on your credit report is your rental history. This
will have to be verified independently either through a letter
from your landlord or copies of your rent checks that have
cleared your bank account.
If you feel like you pay all of your creditors as agreed,
you probably have excellent credit. If your credit report
confirms that you do pay on time and in full, you should have
no difficulty in obtaining a mortgage. Do keep in mind that
you never want to have too much outstanding debt so that you
qualify from an income position.
If you do not have much of a credit history, for whatever
reason, you can still obtain a mortgage loan. For instance,
when you pay your monthly phone or public service bill(s),
these companies do not report your payments to a credit reporting
agency. However, these are sources of credit you may have
obtained. Your lender/broker will need verification of payments
to these non-traditional credit references. Ask your lender/broker
for details regarding these types of credit references.
Some potential home buyers might have less than perfect credit
histories. If you feel like you fall into this category, discuss
your particular situation with a lender/broker. Many programs
exist for different types of borrowers. Your dream of home
ownership might still be within reach.
Down Payment:
In the past, if you did not have at least 20% of a home's
purchase price as a down payment, you could not qualify for
a mortgage. Unfortunately, that kept many people from buying
a home. That is not the case today. As a result of government
programs, private lenders, and mortgage insurance you can
buy a home with as little as 3% down. And in some situations,
mortgage companies are beginning to offer programs requiring
no money down.
Mortgage insurance companies play a major role in helping
a homeowner with less than 20% down obtain a mortgage and
purchase a home. Basically, a mortgage insurance company insures
the lender for the difference between what a borrower puts
down (as little as 3%) and the 20% down the lender would normally
require as down payment. Any mortgage amount you borrow that
is more than 80% of the home's purchase price will require
mortgage insurance. With conventional financing, you will
pay the mortgage insurance with your monthly mortgage payment.
FHA requires a monthly mortgage insurance payment along with
an up front insurance premium that is financed in your loan
amount. VA requires an up front premium that can be financed
into your loan amount.
Regarding your actual down payment, however much it is, your
lender/broker will have a few requirements. The most common
requirement is that the money you set aside for your down
payment can be verified as yours. Some mortgage programs may
allow for your down payment to come from other sources, however,
it is more likely you will have to prove that your funds for
your down payment are your own. Another requirement concerns
the liquidity of your funds. A cash balance in your local
bank account is considered to be the most liquid. Stocks,
bonds, or any other assets (including property) are not considered
liquid, but if sold and documented to have been your own,
are perfectly acceptable.
Home ownership is at an all time high because of low down
payment options. With a low down payment, many first-time
home buyers are now able to experience the benefits of home
ownership sooner than ever before.
Remember that the guidelines outlined above are general in
nature and your lender/broker can provide any specific requirements
for your situation.
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What's next?
You've weighed the benefits versus the new responsibilities
of owning your own home, and you think you qualify for a mortgage.
So what's next?
Find a Lender/Broker
The first thing you will want to do is find a qualified mortgage
lender/broker to verify that you do qualify for a mortgage
loan. This can be done before you even start shopping for
a home and most Realtors will recommend you get pre-approved
for a mortgage also.
Find a Realtor
The second thing you should do is find a qualified Realtor.
Although you may think you can find a home by yourself, by
looking in the paper or driving through neighborhoods, a Realtor
is an invaluable assistant. Not only will he or she be able
to direct you to your dream home, a Realtor assists with the
negotiating and entire home buying process. As a buyer, a
Realtor will provide most of these services to you free of
charge. Be sure to find out if the Realtor you choose will
be working for you as a buyer's agent, or for the seller as
a seller's agent. It is usually desirable to find a Realtor
that will be your agent so that you will be satisfactorily
represented throughout the process.
Don't make any major changes
Do not make any major financial changes in the weeks or months
leading up to buying your home. Any new debt could change
the loan amount of the mortgage for which you qualify. A change
in jobs, especially from regular employee to self-employed,
could change the type of loan for which you qualify. Discuss
any changes you must make with your lender/broker first. He
or she may be able to advise you on the proper steps to take
so that you can still become a homeowner.
Have patience
Finding a home should not be taken lightly. You will want
to take your time and research the home you finally purchase.
If you are living in a tight home market, where there are
more buyers than sellers, you may need to make your offer
on a particular home quickly, but that does not negate the
fact that you should do your research. Plan on treating your
home search as a part-time job. In the end, you will find
that all of your hard work resulted in the benefits of home
ownership.
Good Luck!
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