Tired of
renting? It could be a great time to buy your first home. In many cities, home
prices have bottomed and rents have risen. Mortgage rates are still super low.
In fact, homes haven't been as affordable since 1971. On the downside, in many
cities buyers have fewer homes from which to choose and more competition for the
best housesIn Austin, Tex., newlyweds Mark and Ariane Corcoran bought
their first home in spring. They were renting in a popular downtown
neighborhood, where they paid $1,200 a month for a 500-square-foot loft
apartment, when they inherited enough money for a down payment. When they began
shopping, they expected to buy a classic 1930s Austin bungalow. They found lots
of prospects online but drove by most of them. "Agents are really good at taking
photos that exclude what they don't want you to see, like the used-car lot out
back," says Mark.They put in an offer on a $225,000, 800-square-foot
home. But after the home inspection, they realized that it needed $20,000 to
$30,000 in renovations and repairs and that they'd quickly outgrow it. They
walked away during the state-mandated rescission period (during which a buyer
can back out for any reason and get back any earnest money
deposited).Ariane identified their next prospect within an hour after
the listing appeared online. It was a newly built, 1,600-square-foot home with
three bedrooms, 2.5 baths, and a yard for the dogs. The builder asked $270,000,
the couple offered $260,000, he countered and they paid $268,000. They put down
20% to avoid private mortgage insurance and snagged a 30-year fixed rate of
3.75% from a credit union. Their monthly mortgage payment is $1,524.Before you take the
plunge, consider the answers to questions often posed by first-time
buyers:Will I qualify for a mortgage?Lenders
will scrutinize your "three C's"—credit history (your credit score as well as a
deeper dive into your record of debt repayment), capacity (income, savings and
investments) and collateral (your down payment and the value of the property you
want to purchase, as determined by an appraisal). Lenders will verify your
employment (job, school or military) for the past two years and try to predict
how likely it is that you will keep your job. If you're weak in one area,
strength in the other two areas or in a spouse's bona fides may compensate. Or
you may need to beef up your credit score, establish a more stable income
history or save for a bigger down payment. How much house can I
afford?That depends on the monthly mortgage payment for which
you qualify. Lenders apply payment-to-income ratios that you can also use for a
ballpark estimate. Under the rules set by Fannie Mae and Freddie Mac (agencies
that guarantee the loans made by lenders), your monthly mortgage payment
shouldn't exceed 28% of your monthly gross income (before taxes and other
deductions). That includes principal and interest, real estate taxes, homeowners
(hazard) insurance, and homeowners association dues.Recurring monthly
payments for all debts—mortgage, car loans, credit cards and student loans, even
if they're deferred—shouldn't exceed 36% of your monthly gross income. (With
student loans, it's the monthly payments, not the total debt, that count.) The
Federal Housing Administration (FHA), another loan guarantor, allows ratios for
mortgage and all debts of 31% and 43%, respectively (it doesn't include
student-loan payments that are deferred for a year or more).Lenders
don't factor in the cost of maintaining a home. To play it safe, budget for
one-twelfth of 1% of the home's value for monthly upkeep.What
will my interest rate be?The higher your credit score, the
bigger your down payment and the lower the risk of default you pose to the
lender, the better the interest rate you'll get. You'll secure the best
rate—somewhere near the recent 30-year fixed-rate average of 4%—if you have a
credit score of at least 740 and can put down 40% of the purchase price, says
Ramez Fahmy, sales manager of Caliber Funding, in Bethesda, Md. Lenders add a
quarter point to their best rate if you put 15% or 20% down, as long as your
credit score is at least 740. But let's say you put down less than 15%. With a
credit score of 740 or higher, you'll pay an extra quarter of a percentage point
on your rate; with a score of 720 to 740, you'll pay a half-point more; and with
a score of 700 to 720, expect to pay a full point more. If your score is lower
than 700, you'll pay from 1.25 to 3.25 points more.
TONY LEOCADIO
www.agentx2.com
www.youragentgreg.com
www.fullertonhomesearch.com