Buyer, be wise
FROM THE NATIONAL ENDOWMENT FOR FINANCIAL EDUCATION (NEFE)
Buying a home is a financial milestone that many hope to achieve, and with the addition of a baby, expanding your living space now may be a high priority. Finding the best home for your family is the goal, but more important is finding the best home for your budget.
Owning a home provides financial benefits such as building equity, leveraging tax write-offs and adding to your asset base. But with those benefits comes the additional cost of property taxes, insurance and maintenance. The home-buying process likely will be stressful, with realtors and mortgage lenders tempting you to overspend.
1. Understand How Lenders Qualify Loans. Do the math ahead of time, and calculate all the costs associated with buying a home — such as property taxes, homeowner association fees, homeowner insurance, utilities, maintenance and repairs, and the costs of closing a loan.
Most lenders use some variation of the 28/36 Rule. This means that principal, interest, taxes and insurance (PITI) cannot exceed 28 percent of the borrower’s gross monthly income, and PITI — plus all outstanding consumer debt (such as car loans and credit card payments) — cannot exceed 36 percent of gross income.
But remember, your budget also includes childcare, groceries, gas and health insurance — typically things that don’t count against your financial obligations from a lender’s point of view.
Under the 28/36 Rule, a two-income couple earning $60,000 annually — or $5,000 gross a month — would qualify for around a $1,400 monthly PITI payment ($5,000 x .28 percent) assuming they had no other debt, and a $1,200 monthly payment if they had $600 of monthly consumer debt payments ($5,000 x .36 percent = $1,800 minus $600 = $1,200).
If you are unable to afford a home within these guidelines, continue saving to increase your down payment while repaying consumer debts. Also inquire about loan programs for first-time buyers that may decrease your down payment.
2. Follow the “Rule of Three.” For every required service provider — whether a realtor, mortgage lender, home inspector, property insurance company or attorney — compare at least three competing firms. Seek referrals from friends, family and coworkers who already have gone through the home-buying process. Use the Internet to shop around and compare services.
3. Remember the Cost of Insurance. Purchase liability limits of at least $300,000 ($500,000 is preferred) on homeowner insurance, and secure adequate coverage to rebuild your home in the event of a loss. A property and casualty insurance agent can assist you with these decisions.
4. If Buying a Fixer-Upper, Make Sensible Improvements. If your first house won’t be your last house (and it probably won’t be), make improvements that provide reasonable return.
Some renovations — such as adding a bathroom, remodeling a kitchen or landscaping — can increase appraisal values significantly, compared to adding a game room or a pool. Beware, however, of over-improving a house. A general rule is that you cannot expect a house to sell for more than 20 percent above the neighborhood average. The value of a home is influenced greatly by its geographic location and the value of comparable homes that surround it.
5. Anticipate Future Expenses. Prepare yourself for when you need to replace a roof, furnace or major household appliance. Many of these expenses arise with little warning, so have an emergency fund in place. Also, if you plan on having another child, you will have increased childcare costs.
Remember: Before buying your first home, be sure to consider the future.
Ready for your dream house? Ask yourself ten questions first: www.smartaboutmoney.org.