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!