By Lee Nelson
You are so excited to finally go look at houses to buy. You’ve been renting for a long time, and it’s just time to have your own place. You’ve saved for a good down payment. Congratulations. But have you really considered how much house you can afford which includes all the upkeep, the utilities and actually living your life?
“Most of my personal wealth has been acquired through the purchase and sale of my own homes across the country in many different states and economies,” says Jack Gloriod, owner and real estate agent at Gloriod and Associates, Inc., in Colorado Springs, Colo. “Having said that, there is financial danger that must be considered when buying a home.”
He says the foremost consideration is buying in a growing or shrinking market. “Values in the one will grow. and the other will decline over time. Don’t fight the trend. But also don’t miss the opportunity.”
Acccording to a study done in September 2013 by the National Association of Home Builders, 65 percent of U.S. households own their own homes. That’s great.
But Gloriod says that potential home buyers need to always consider affordability when looking at houses.
“The government will not allow you to buy more than you can afford. A reputable lender can prequalify you and help you to know what a loan will cost and what your monthly payments will be. Ask the lender for a good faith estimate,” he says.
New mortgage rules after the mortgage meltdown a few years ago have been designed to protect the homebuyer and the lenders. In today’s lending world, it is called a Qualified Mortgage, according to the Consumer Financial Protection Bureau. A qualified mortgage is based on common-sense ideas such as the borrower should be able to repay the loan, the terms of the loan should be safer for borrowers, and the loan should be simple enough to understand.
To get a Qualified Mortgage, your monthly debt-to-income ratio must be at or below 43 percent. That means all your debts including the mortgage, credit card bills and car loans cannot exceed more than 43 percent of your gross monthly income. But the lower your debt-to-income ratio is the better for you. You’ll actually have money left over to live your life.
Not every loan has to be a Qualified Mortgage, the bureau says. But lenders still must evaluate a borrower’s income, debts and other financial data. It sounds simple enough. But in the past, many bad lenders weren’t checking all that stuff before the crisis began.
But remember when deciding on a home to buy, your total costs are not just your mortgage, closing costs and taxes. You need to consider all the expenses to run a home including the water, sewer, electricity, maintenance such as if a window gets broken, and insurance. The National Association of Home Builders says the total cost to run a home is about 4.24 percent of a home’s total value per year, but less for newer homes. For instance, if you have a $200,000 home, your operating costs will be about $8,480 yearly. That’s not always easy to come up with especially if you have other debts such as having a child go off to college or your car breaks down and you need to replace it.
“The larger your house payment, the less you have for other necessities such as food, gas and clothes,” Gloriod says. “Also, you are going to spend money on entertainment, eating out, vacations and more. Where do you want your money to go? Are you willing to sacrifice instant gratification for long term well-being?
There are a lot of questions to ask yourself. Plus, you need to be able to have a cash reserve available for those unexpected problems that arise. As a renter, the landlord took care of a broken water heater or repaving the driveway. Now, it will be all your responsibility.
But as a homeowner, you also get some good federal income tax benefits that might offset some of your costs. While buying a home may cost a little more than you think, the investment in property can still be worthwhile as long as you buy what you can afford, budget for expected and unexpected expenses and hold onto your home for at least seven to 10 years.
“When purchasing a home, you must have at least a three-year horizon to normal profit,” Gloriod says. “Assume your home appreciates 5 percent years for three years.”
For instance, he says that a $200,000 home will appreciate to $231,525 in 36 months – a $31,525 gain. Should this home appreciate by 7 percent a year, the gains would be $45,000 for a $200,000 home.
“This all looks good but you have to take care of a house for the value to increase. This means you must spend time, money and effort to care for the home and the landscaping,” he says.” The good news is that owning your own home is very satisfying.”
Lee Nelson writes for national and regional magazines, websites, and business journals. Her work has appeared in Yahoo! Homes and many Hearst publications such as Life@Home and Women@Work.