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.
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.
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 paystubs 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.
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 homebuyers 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 homeownership
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.
Homeownership is at an all time high because of low down payment options.
With a low down payment, many first-time homebuyers are now able to experience
the benefits of homeownership 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.
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 homeownership.
Good Luck!