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There are many good reasons to own the roof over your head, but there are many tradeoffs as well. Here's how to decide if the time is right for you. The housing market boom and bust taught us many lessons, including that home ownership isn’t such a “no brainer” after all. No doubt, there are plenty of good reasons to own the roof over your head, both emotional and financial. But there are many trade-offs as well. With the added control comes a laundry list of responsibilities. With the stability of staying put comes a loss of flexibility. And with the opportunity to build equity comes the risk of losing money. In fact, homeownership in America is at its lowest rate since 1995. It was recently just 65%, according to the Census Bureau, down from 69% in 2004. Although tighter lending standards, economic uncertainty, and in many cities high home prices are partly to blame, many would-be buyers are staying on the sidelines by choice. Which often makes sense.  123rf.com Here are five questions to ask before you make the leap into ownership. 1) Is my financial house in order? If you’re already struggling to pay your bills, buying a home will only compound your money woes. Ideally, you’ve saved at least 10% for a down payment – keep in mind you’ll have to pay private mortgage insurance if your down payment is less than 20% — and that’s in addition to saving for retirement and building an emergency fund. “If you’re not in a position to save for a down payment, you probably aren’t in the position to buy your own home,” says John Vento, a New York-based CFP and CPA, and author of Financial Independence (Getting to Point X): An Advisor’s Guide to Comprehensive Wealth Management. “You have to prove you have the discipline and ability to save. One of the big problems that led to crash of 2008 is we forgot about this principle.” 2) Am I sticking around for a while? The old rule of thumb was that buying made sense if you planned to stay put for at least three to five years. These days, many financial planners are recommending an even longer window. “I say at least seven years because the transaction costs of buying a home are signification,” notes Vento. When you buy, there are the costs of securing the loan, closing on the sale and moving, not to mention all of the miscellaneous items (fresh paint, new curtains) that can easily add up to thousands of dollars. When it’s time to sell, you’ll lose a big chunk – 6% is typical – in real estate sales commissions. Given the historical rate of home price appreciation, says Vento, it will likely take at least five years to break even when all is said and done. As important as the numbers, is whether you’re ready to tie yourself down to a particular home in a particular city. “Depending on what you do for a living and the job market in your area, you may be better off continuing to rent,” says in Charlotte, NC planner Ann Reilley Gugle. 3) What is the after-tax cost of owning?
If you’re on solid financial ground and ready to make a longer-term commitment, the next step is to get a realistic estimate of what you can expect to spend, and how that breaks down monthly. You can get a basic estimate by plugging the home price minus your down payment into a mortgage calculator like this one. Most calculators also allow for property taxes and homeowners insurance. If you live in an area where taxes or insurance are higher than the national average, however, plug in numbers based on what’s realistic for your market. This is a good starting point, but it doesn’t tell the whole picture. On the plus side, a small (albeit, initially tiny) portion of your mortgage will go toward principal. “That’s a forced savings plan,” says Vinto. There are tax advantages too. If you itemize your deductions – as many homeowners do – your mortgage interest and property taxes are deductible. Down the road when you sell, moreover, you can realize up to $250,000 in profit (double that if you’re married) before you owe capital gains tax. 4) And what are the hidden expenses? There are many additional costs of homeownership that unseasoned buyers tend to overlook, says Google. Four out of five buyers of new homes, including condos and townhomes, can expect to pay homeowner association fees. This additional levy – which pays for costs of shared infrastructure and amenities – can add hundreds of dollars to your monthly expense, and it’s not uncommon for owners to get hit with special assessments for projects not covered in the regular budget. Most single-family home owners will need to budget – money and time – for routine maintenances costs, as well as big-ticket projects, such as paint jobs and new roofs. “You have to be ready to take on all the things that come with ownership,” adds Gugle. “It’s not for everyone.” 5) What’s happening in my market? Economists may talk about real estate in national terms, but the market varies greatly from one city to the next, even from one neighborhood to the next. Although home prices in most U.S. cities are still relatively affordable, some cities (i.e. San Francisco) have seen their home prices bounce back to near boom-time highs. Then again, in many cities, the rental market is as competitive, if not more competitive. Nationally, half of all renters are spending more than 30% of their income on housing, according to the Joint Center of Housing Studies of Harvard University, up from 38% of renters in 2000. For renters, an improving economy is a Catch-22; as their incomes go up, so too does their rent. Therein lies one big benefit of owning the roof over your head: Assuming you plan to stay put for a while and lock in a fixed-rate mortgage, your costs should remain relatively stable from year to year; in time they’ll actually go down. For many buyers, that’s all the reason they need to get off the fence and into the housing market.
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 Mortgage Myth: In the early to mid‑2000s, back before the housing bubble burst, conventional wisdom held that anyone with a pulse could get a mortgage. While that wasn’t accurate, it was true that qualifying for a home mortgage was easier than perhaps it should have been for some people. Fast‑forward to today, when the pendulum has swung the other way. Guidelines have tightened up, lenders are providing much greater amounts of scrutiny, and products such as “stated income loans” – which didn’t require verification of income – have fallen by the wayside. This more rigorous lending environment has given rise to a few mortgage myths. Many people now believe that without outstanding credit, a sizable down payment, or minimal debt, they just won’t be able to qualify for a home loan. Not so! There are a wide range of mortgage programs available to many different buyer circumstances, so don’t count yourself out of landing a mortgage – and a new home – just yet. Here’s a look at three mortgage‑qualifying myths and their corresponding realities. Mortgage Myth #1: You need excellent credit to get a mortgage Reality: False First, find out what your consumer credit score looks like. You can get a free credit report every 12 months from annualcreditreport.com. However, although it can tell you how you’re doing overall, this report won’t include a specific score – getting an actual number will cost you some additional cash. While it won’t be exactly the same as your mortgage FICO score, which lenders use, it will give you an idea if you’re in the right ballpark. (To get your actual mortgage FICO scores, your best bet is to have a mortgage professional pull it for you.) For reference, many lenders might consider scores in the following way: Excellent: high 700s or above Good: low to mid‑700s Fair: mid‑600s low 700s Poor: low to mid‑600s Subpar: below 620 For the best rates and terms you’ll want an excellent score, but you can often qualify for a competitive mortgage if you have a good or fair credit score. And even if you have poor credit, don’t give up! FHA loans, insured by the Federal Housing Administration, are the top choice for those with less‑than‑sparkling credit histories and are offered by the majority of lenders. The minimum credit score for an FHA loan can be as low as 500, though most of the insured loans require a score of 580. The FHA also offers credit counseling. Working directly with a lender, even if you have a low credit score, can also help. You may be able to offset a poor score by showing your lender that you’ve paid your rent on time for the past year (or two, depending on the lender), you’ve made all other payments, and you have enough cash saved to keep you afloat for six months’ worth of regular expenses if you need it. Finally, if you can’t go it alone based on your credit score, there’s one final option: getting a co‑signer. But both you and the co‑signer need to consider this option very carefully, because he or she would be taking on the responsibility to pay the loan if you default. Mortgage Myth #2: I need a lot of cash for the down payment Reality: False While having enough cash on hand to plunk down 20 percent of the purchase price is a great thing to shoot for, it’s not necessary. That magic 20 percent mark does mean you don’t have to pay for private mortgage insurance (PMI) or government‑backed mortgage insurance (an FHA loan), which protects the lender in case you default. PMI can add a couple hundred dollars a month to your mortgage payment, but that won’t last forever. Once you get 20 percent of the principal paid off, you can ask to have the insurance taken off the loan. Once you get 22 percent paid, the lender must remove it. FHA loans come in handy here, too – you can put as little as 3.5 percent down. If you’re currently in the armed services, are a veteran, or are an eligible surviving spouse, you can get certain types of VA loans with no cash down. You can also get a conventional 30‑year mortgage with only 3 percent down backed by Fannie Mae or Freddie Mac. You’ll have to pay PMI and have a credit score of at least 620, along with providing complete documentation of your income, other assets and job status. Homeownership counseling is also required. Depending on where you live, you might be able to take advantage of down‑payment assistance programs offered by state or local housing authorities, community or not‑for‑profit agencies, or lenders. You’ll have to figure out what you’re eligible for. Some programs are aimed at first‑time homebuyers, or given as assistance to revitalize distressed properties or neighborhoods, or are set aside for people with certain occupations – like firefighters, EMTs, police officers, and teachers – to encourage or allow them to live in the places they serve. Mortgage Myth #3: I have too much debt to qualify for a loan Reality: Not necessarily While you might have a credit card or two, a car loan, and student loans, that might not be too much debt for you to qualify for a mortgage. The only real way to figure that out is to calculate your debt‑to‑income ratio (DTI), which can be as important to a lender as your credit score. To figure out your DTI, add up what you pay for your current mortgage or rent, car payments, minimum credit card payments, student loans, child support and any other loan obligations. Take the total of your recurring monthly debts and divide by your gross monthly income to arrive at your DTI. The more you make every month, the more debt you can afford to carry. If your monthly debts are $1,500 per month and your gross monthly income is $6,000, your DTI is 25 percent. When calculating your DTI, a lender will also add in things like property taxes that will come with a new home that add on to regularly recurring debt. A DTI of 28 and below is considered outstanding, but you can qualify for a conventional or VA mortgage if your monthly debt payments are under 45 percent of your gross income. Not there? Consider an FHA loan, which wants your ceiling to be below 57 percent.  123rf.com The Takeaway
You can see the truth about these myths is that any one of these situations won’t necessarily stop you from getting a mortgage. So maybe you have a high DTI, but you can afford a 20 percent or more down payment and your credit score is excellent. Your mortgage professional can probably find a product that’s right for you. And as always, the best way to debunk mortgage myths is to talk to a mortgage advisor, who can cut through the confusion and get you real answers. |
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