Thanks to the 2008 financial crisis, it has become more difficult to buy a house these days. Although the government has done little to rein in the excesses by lenders that sparked the Great Recession, it has tightened regulations on borrowers, making many think owning a home is out of their reach.
But with the current tight rental market, buying might make more sense than renting. Of course, you can’t come into the hunt with the expectations of those so often seen on the house-hunt TV shows, with their wish list including three or four bedrooms, granite countertops, and a view of the ocean, on a substitute teacher’s salary. If you’re willing to start small and pare your wish list, you might find the perfect starter home for you.
First, decide whether it makes more sense to buy or continue to rent. With renting at its highest level in 50 years, rents are going up and rental properties are more scarce. A 30-year-fixed mortgage protects you from rent increases, but any taxes assessed on the property may increase the cost of your mortgage. On the other hand, with current tax rules, you can deduct the cost of the mortgage interest on your taxes. You will also build equity in the house that will allow you to move up to better quarters in the future, or if you stay put, you will be paying only taxes on the property after 15 or 30 years, depending on the length of your loan.
Another factor to consider is how long you’ll remain in the property. The old rule of thumb was, don’t buy unless you’ll be there for five years. Many financial advisors now suggest the better time frame is seven to 10 years, to allow time to recoup up-front and moving costs.
If you’ve decided to buy, figure out how much house you can afford. The general rule most lenders follow is, all your debts (including mortgage) should be less than 36% of your gross income. Another way they calculate is strictly on the PITI (principle, interest, taxes, and insurance), which should be no more than 28% of your gross income. Regardless of what a lender might think, you need to calculate how much debt you’re comfortable with carrying. If you wind up “house poor,” will you have money for a new car, vacations, vet bills, other unexpected expenses?
Also add in such costs as home-owners association (HOA) or condo fees, homeowner’s insurance, and closing costs. In addition, many people fail to consider home-owning expenses such as maintenance. If the HVAC system fails or the plumbing is messed up, you can pick up the phone to the landlord if you’re renting. Otherwise, that’s an out-of-pocket cost for the homeowner.
These are all factors you need to consider before making the decision to purchase.
If you decide to go ahead and buy, you need to come up with the down payment. If you don’t have the traditional 20% usually required, you can get into a house for less, but you’ll have to pay for private mortgage insurance (PMI), which can cost several hundred dollars per month, depending on the size of the mortgage. So it’s best to come up with the down payment on your own.
There are numerous ways to go about this, from cutting expenses to taking on a lucrative side gig. This is where Billshark can help, because no one is better at helping you pare your bills than we are.
You can also borrow up to half the balance in your 401(K) account, but this is a risky move, because you have to repay the loan (plus interest) within five years. And if you change jobs before you’ve paid it back, you have to repay the remaining balance within 60 days.
You could also look for such options as VA loans, which require no down payment or PMI; Federal Housing Administration (FHA) loans, which require only 3.5% down payments for qualified buyers; and government-sponsored enterprises (GSE) loans, which require only a 3% down payment. Some buyers in rural and suburban areas may also be able to obtain 100%-financed loans from the U.S. Department of Agriculture (USDA).
Of course, you’ll need to ensure your credit is in good shape. Lender requirements vary, but in general you’ll need a FICO score in the upper 600s (FHA will take a minimum of 580). And the higher your score, the lower your interest rate on the loan. So while you’re saving for the down payment, you can work on increasing your credit score at the same time, by paying down loan and credit card balances and ensuring all bills are paid on time.
Finally, don’t get involved emotionally in your search for a home. You should have no more emotional investment in buying a home than in selecting a credit card. Know going in what you need (not what you want) to live comfortably, what you can afford, and where you have to live. Don’t fall in love with any property. Look for bargains just as you would if you were buying a car.