Monday, December 14, 2009

Is home ownership right for you?

The answer depends on your financial situation, your future plans, and what you hope to do for yourself and your family by buying and owning a home.

Let's start with your financial situation. Ask yourself the following questions:

- Do you have a steady, reliable source of income and a steady employment history for at least three years?
- Do you have a good credit history and understand how to manage your credit?
- Is your total debt manageable? Can you pay all your bills on time and still afford to take on the costs associated with homeownership?
- Can you save money for a down payment and closing costs or you have access to other sources of funds, such as an employment bonus, tax refund, or a gift from a relative?
- Do you have adequate savings to weather an unexpected loss of income or an emergency?

Next consider your future plans. Can you balance the costs of owning and maintaining a home (like repairs and maintenance) against other major expenses, such as buying a car, taking a vacation, saving for college or raising a family?

After looking at your financial situation and the costs of owning a home, consider how much you can afford to spend buying a house as well as the risks and rewards of becoming a homeowner.

1. Why Own?

While homeownership comes with many responsibilities that you need to be aware of, most financial advisers say there are also many advantages.

You'll have a place that is yours!
Homeownership provides shelter and security for you and your family. You can pass your home down to your children, and their children, creating security for generations to come.

You may have some tax benefits with homeownership.
Homeownership can reduce the federal income taxes you pay. You can deduct the interest on your home mortgage and property taxes you pay on your home on the tax returns you file each year. These tax savings may offset a portion of the cost of owning your home. While tax savings can reduce the cost of homeownership over time, you still need to make sure you can afford the monthly mortgage payments.

Your monthly payments will remain stable if you choose a fixed-rate mortgage!
If you choose a mortgage with a fixed-interest rate (one that stays the same for the life of the loan, say 30 years), you'll pay the same mortgage payment each month for the entire 30 years of the loan (but remember if your taxes go up, your escrow will go up – increasing your monthly payment).

You'll contribute to your nest egg!
Owning a home can be a way to build long-term financial security and independence.

But remember with all the benefits of homeownership comes responsibilities too – a mortgage, upkeep of a home and repair bills just to name a few.

2. How Much Can You Afford to Spend on a Home?

To get a very rough estimate of what you can afford to spend, multiply your annual gross income by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is a very rough estimate – the actual numbers will vary based on different factors like current interest rates and your debt and credit history. Other factors to keep in mind are your current bills and overall debt, your current lifestyle and future plans. But the most important factor in determining how much you can afford is taking an honest look at what you can spend comfortably for your monthly housing costs.

Mortgage lenders typically use two ratios to more accurately determine how much you can afford to spend on your mortgage.

Housing Expense Ratio
Mortgage lenders recommend that your monthly mortgage payment (principal, interest, taxes and insurance) be less than 28-31% of your monthly gross income. This percentage can change based on the type of mortgage you choose and sometimes the area in which you're looking to buy.

Debt-to-Income Ratio
You need to factor your other debts into determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 30-40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses.

Talk to a mortgage lender or housing counselor who can help you better understand the guidelines or requirements. Before you talk to one, organize your financial picture by creating a budget. Don't forget that you also have to save for the down payment, closing costs, inspection costs, moving, and other related expenses.

You should also take into account any future plans such as a wedding, college education or birth of a child that will impact your budget and how much you can spend on a home. It is important to be realistic – you don’t want to buy your dream home only to realize afterwards that it is more than you can comfortably afford.

Remember that the mortgage is not the only expense of homeownership. Other expenses include:-homeowner's insurance
-interest and taxes (which may be factored into your monthly mortgage payment)
-maintenance costs
-water and garbage services
-unexpected repairs
-When deciding what you can afford, be sure to look at the big picture and not just the price of the home.

Don't make the mistake of trying to buy more house than you can afford. Thinking that you can get by for a couple of years until your salary catches up with your monthly mortgage payment is setting yourself up for trouble. Instead, buy what you can comfortably afford today – not 5 years from now.

Don't be discouraged!
If what you can afford is less than the average single-family home in your area, look at townhouses, condos, and cooperatives – they're often less expensive.

It's better to start small than to find yourself with a mortgage you cannot afford!

3. What Are the Risks?
Overall, homeownership is a good investment for most people, but there are risks. If you understand the benefits and risks of homeownership, you can make the best decision about when to buy a home.

So what are the risks of homeownership?

Monthly housing expenses can increase.
Your monthly mortgage payment may be larger than your rent. While these higher monthly payments may be offset by a tax benefit at the end of the year, you will still need to make sure you can afford the monthly mortgage payments. Talk to a tax professional to understand your particular situation. Also, think carefully about introductory rates or low initial rates that allow you to buy a home you would not otherwise qualify for. When the rate increases you may find it difficult to make the monthly mortgage payment.

You become your own landlord.
If an appliance breaks, you will have to pay for its repair or replacement. You are also responsible for the maintenance and upkeep of your home and your property. Maintenance and upkeep affect your home's value so it is important that you have the budget to fix things in order to protect your investment.

You may need to sell your house due to life circumstances.
Depending on the local real estate market, you might not be able to sell your home quickly. You may also face additional expenses, such as hiring a real estate professional. Be sure you have adequate savings as a buffer before you buy a home in case you find yourself in this situation and cannot sell your home quickly.

Property values can depreciate.
You can lose value in your home for a number of reasons, such as a recession, the condition of your home not being kept up, or a drop in a neighborhood's home values. If your home loses value and you have to sell it for less than you owe, you will be required to repay the full amount you borrowed. Regardless of your home's value you still have the obligation to pay the mortgage even if the home is worth less than you paid for it.

Downsizing quickly may be difficult.

If you need to sell your home, it may take some time and you'll still be responsible for the mortgage until it is sold.

Homeownership is still a great way to create equity for the future while providing stability and security for you and your family. But it is important to look at the benefits and risks and weigh them carefully before deciding if now is the time to become a homeowner.

If you are already having credit or financial difficulties, take the time to work through those issues before starting the home buying process. You will be in a much better position to be a responsible homeowner and you will enjoy the benefits of homeownership much more!

4. Myths About Homeownership
How lenders assess mortgage applications has changed a lot since 2007. What was acceptable a few years ago may not be so today. The following are some common homeownership myths:

Myth: It’s a bad time to buy a house.
Fact: Mortgage rates for fixed-rate mortgages are at historical lows, creating stable payments and long-term savings for today's homebuyers and house prices have fallen at a record pace. Additionally, there is some financial relief for first-time homebuyers through the recently enacted Housing and Economic Recovery Act of 2008 and foreclosures have increased to record levels, leaving lots of housing supply on the market with unequalled demand. The combination of these factors generally equals greater affordability, and makes now a good time for many to consider homeownership.

Myth: Buying a house is just too risky; I'll end up in foreclosure.
Fact:The recent news on foreclosures is understandably frightening. Certainly if you lose your job, go through a divorce, or suffer an illness, you could have real trouble paying your mortgage, or rent for that matter. In recent years, we've even seen an increase in excessive obligation–just too many bills–as a reason for delinquency. While you can't always solve for the unexpected twists and turns of life, good budgeting and responsible credit practices can decrease the likelihood of a foreclosure. Also if you have trouble paying the mortgage, contact your lender immediately!

Myth: You can't buy a home in the U.S. if you're not a citizen.
Fact:If you're a permanent or non-permanent resident alien, you can purchase a home in the U.S. In order to qualify for a loan you typically need to be a permanent resident alien with a valid USCIS card or, a "Green Card" and Social Security number. If you are a temporary resident alien with a valid work permit and Social Security number and have been in the United States continuously for the last 2 years, with steady employment and good credit history you may also qualify for a loan.

Myth: If you don't have a bank account or credit cards, you can't qualify for a mortgage.
Fact: Having a bank account is always a good idea and helps you establish credit. However, lenders can approve you for a mortgage even if you don't have a bank account or credit cards. You'll likely need to keep records showing a history of payments you've made for items such as rent, utilities, and car payments.

Myth: Lenders share your personal financial information with other companies.
Fact: By law, banks and other financial institutions are restricted in their uses and disclosures of information about you. In some situations, you may choose to restrict the disclosure of your information if you don't want it to be shared. If you are unsure how your information will be used, don't be afraid to ask – it's your right to know.

Myth: If you're late on your monthly mortgage payments, you'll lose your house.
Fact: If you have a financial hardship, like the death of your spouse or a medical emergency, and fall behind, it's possible to keep your home and get back on track if you contact your lender early (the organization to whom you make your monthly mortgage payments, sometimes also referred to as your mortgage servicer).

If you experience a change in your financial situation and think that you will fall behind or have fallen behind on your mortgage payment, call your lender immediately.

Despite popular belief, lenders do not want to foreclose on homes. They want to keep you as a customer for life. In fact, lenders typically lose money in the foreclosure process, so they are always looking for ways to help you make ends meet.

Myth: You can't get a mortgage if you've changed jobs several times in the last few years.
Fact: Not true. You can change jobs several times and still get a loan to buy a home. Lenders understand that people change jobs. The important thing is to show that you've had a stable income and good credit.