Buying Your Home- What
Can You Afford
How much does my real estate agent need to know?
Real estate agents
would say that the more you tell them, the better they can negotiate on your
behalf. However, the degree of trust you have with an agent may depend upon
their legal obligation. Agents working for buyers have three possible choices:
They can represent the buyer exclusively, called single agency, or represent
the seller exclusively, called sub- agency, or represent both the buyer and
seller in a dual-agency situation. Some states require agents to disclose all
possible agency relationships before they enter into a residential real estate
transaction. Here is a summary of the three basic types:
How much will I spend
on maintenance expenses?
Experts generally
agree that you can plan on annually spend 1 percent of the purchase price of
your house on repairing gutters, caulking windows, sealing your driveway and
the myriad other maintenance chores that come with the privilege of
homeownership. Newer homes will cost less to maintain than older homes. It also
depends on how well the house has been maintained over the years.
What is the standard debt-to-income ratio?
A standard ratio used
by lenders limits the mortgage payment to 28 percent of the borrower's gross
income and the mortgage payment, combined with all other debts, to 36 percent
of the total. The fact that some loan applicants are accustomed to spending 40
percent of their monthly
income on rent -- and still promptly make the payment each time
-- has prompted some lenders to broaden their acceptable mortgage payment
amount when considered as a percentage of the applicant's income. Other real
estate experts tell borrowers facing rejection to compensate for negative
factors by saving up a larger down payment. Mortgage loans requiring little or
no outside documentation often can be obtained with down payments of 25 percent
or more of the purchase price.
What can I afford?
Know what you can afford is the first rule of home
buying, and that depends on how much income and how much debt you
have. In general, lenders don't want borrowers to spend more than 28 percent of
their gross income per month on a mortgage payment or more than 36 percent on
debts. It pays to check with several lenders before you start searching for a
home. Most will be happy to roughly calculate what you can afford and
prequalify you for a loan. The price you can afford to pay for a home will
depend on six factors:
Another figure
lenders use to evaluate how much you can afford is the housing
expense-to-income ratio. It is determined by calculating your projected monthly
housing expense, which consists of the principal and interest payment on your
new home loan, property taxes and hazard insurance (or PITI as it is known). If
you have to pay monthly homeowners association dues and/or private mortgage
insurance, this also will be added to your PITI. This ratio should fall between
28 to 33 %, although some lenders will go higher under certain circumstances.
Your total debt-to-income ratio should be in the 34 to 38 % range.
When is the best time to buy?
Here are some
frequently cited reasons for buying a house:
Where do I get information on housing market
stats?
A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards. For overall housing statistics, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builders association probably gets this report. If not, the housing research firm is located in Canton, Mich.; call (800) 755-6269 for information; the firm also maintains an Internet site. Finally, check with the U.S. Bureau of the Census in Washington, D.C.; (301) 763-2422. The census bureau also maintains a site on the Internet. The Chicago Title company also has published a pamphlet, "Who's Buying Homes in America." Write Chicago Title and Trust Family of Title Insurers, 171 North Clark St., Chicago, IL 60601-3294.
What is Fannie Mae's
low-down program?
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income. To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae's Community Home Buyers Program. Fannie Mae's new Start-Up Mortgage will assist buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers will receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment loan programs.
How long do
bankruptcies and foreclosures stay on a credit report?
Bankruptcies and
foreclosures can remain on a credit report for seven to 10 years. Some lenders
will consider an borrower earlier if they have reestablished good credit. The
circumstances surrounding the bankruptcy can also influence a lender's
decision. For example, if you went through a bankruptcy because your employer had
financial difficulties, a lender may be more sympathetic. If, however, you went
through bankruptcy because you overextended personal credit lines and lived
beyond your means, the lender probably will be less inclined to be flexible.
How do you determine the value of a troubled property?
Buyers considering a
foreclosure property should obtain as much information as possible from the
lender, including the range of bids expected. It also is important to examine
the property. If you are unable to get into a foreclosure property, check with
surrounding neighbors about the property's condition. It also is possible to do
your own cost comparison through researching comparable properties recorded at
local county recorder's and assessor's offices, or through Internet sites
specializing in property records.