Home ownership is a traditional goal for many Americans. Having a place to call your own provides a sense of stability and community. You can establish roots and get to know your neighbors. Add a room or knock down a wall; the choice is yours. People like owning things and this includes homes.
However, homeowners in many parts of the country have watched the values of their property decrease in recent years. While this isn’t good news for sellers, it does offer an exceptional buying opportunity for many people. Real estate is cyclical; values fall and values increase, but historically real estate has proven to be a good investment. It’s difficult to predict when the absolute bottom of the market will be reached in any particular area, and savvy investors may want to act now to take advantage of the low mortgage interest rates.
If you need a mortgage loan to purchase a home, the first thing you should do is to talk with a mortgage broker or banker. You can start with the bank where you have your checking or savings account. Call the local office and make an appointment to speak to a loan officer. Bring the last two years of your tax returns with you to the meeting. Loans are difficult to obtain and a loan officer can look at your credit report and discuss various options that are available to you. There’s no charge for the meeting.
A bunch of numbers on a lender's schedule do not really indicate whether or not you can afford a house, because they say nothing about how you manage your money. Before you start looking at houses or talking to real estate agents, follow these steps to see if you're ready to buy a house.
The most common requirements for a residential, owner-occupied mortgage loan are two years of steady work, no recent foreclosures or bankruptcies, a minimum credit score of 640, U.S. citizenship or resident alien status and monthly debts – credit cards, auto leases, alimony, child support, projected housing expenses -- shouldn’t be more than 36 percent of your gross monthly income. This is also known as your debt to income ratio.
If you fail to qualify for the mortgage, the loan officer might be able to help you improve your situation. Low credit scores can be improved by paying off some debts and lowering the amount you owe on the credit cards; you can also ask for a higher credit limit on an existing card. If you don’t have two years of continuous employment, plan on delaying the purchase until you meet that milestone. If your income is insufficient to qualify, you might be able to add a co-borrower who has sufficient income and a good credit score to the mortgage. The loan officer will explain the details to you. Lastly, don't forget about the closing costs involved in buying a home. They can add up to thousands.
However, even if you qualify for a home loan, are you really prepared for ownership? When the house needs repairs, there’s no landlord or property management company you can call; maintenance is your responsibility. Property tax and homeowner’s insurance costs may periodically increase and a high insurance deductible means that you’ll pay out-of-pocket for many repairs.
Do you have a stable job? If you lose it, do you have enough of a cushion saved that allows you to continue to make the mortgage payments until you find new employment? Many families live paycheck-to-paycheck and accumulate little in savings. While this may be an acceptable situation for a tenant, a homeowner can be faced with many unexpected costs.
Look at your lifestyle and financial health and determine if home ownership is right for you. If you do decide to move forward, be sure not to make a major credit card purchase until after the closing. The increased debt may kill the deal. Otherwise, have fun looking at homes and choose your advisors wisely.