Can You Buy?
When you're thinking about buying a home, you have to take a hard look at your finances. The first question is whether you have enough cash for a down payment, traditionally 10% to 20% of the purchase price. The next is whether you'll be able to borrow the rest of what you need.
HOW YOU QUALIFY TO BORROW
Being able to find a mortgage may depend on passing two qualifying tests:
Lenders usually require that you spend no more than 28% of your gross income on your mortgage, real estate taxes, and insurance.
Lenders fear that if too much of your income is committed to housing, you face a greater risk of not making your mortgage payments on time.
You can be turned down if your projected mortgage expenses plus other regular debt payments are more than 36% of your total income.
Lenders want to make sure that you can keep up all your regular monthly payments — such as credit card and loan repayments — in addition to the mortgage. So they evaluate all your debts.
To find out how much you'll be able to borrow at current interest rates, you can use a loan and mortgage calculator. They're available online at many lending sites. Or you can buy a loan and mortgage payment table that lists the monthly mortgage payments for different loan amounts at various rates over a number of different terms. They're available in most bookstores.
The following table shows the monthly payments you could expect to make on a 30-year, fixed-rate mortgage. Insurance and property taxes would add to this cost.
|Home price||Down payment||Mortgage loan||Monthly payment |
PAYING THE BILLS
Paying your mortgage isn't the only financial responsibility that's involved with owning your own home. Among the added expenses you may initially overlook — but will almost certainly encounter — are the costs of:
Insurance. You'll need enough homeowner's insurance to cover the mortgage amount. The insurance company may insist that your coverage equal the home's full replacement value.
Property taxes. Local school and property taxes vary enormously from place to place. Check before you buy to determine how much those costs will add to your housing bill.
Commuting. Communities with convenient public transportation may cost more to live in, but can save you time and transportation expenses.
Schools. Paying more for a home in an area with good public schools may be cheaper in the long run than paying for private school — especially if you have several children. And houses in strong school districts often resell more easily and at higher prices.
Maintenance charges. Condominium and co-op charges for monthly expenses can escalate rapidly, so you should anticipate those costs in your purchase decision.
OTHER ROUTES TO OWNERSHIP
If the down payment and income requirements make owning a home seem out of the question, you may want to look for other ways to buy. There are some government-backed programs that make qualifying for a mortgage easier by reducing the amount you need upfront. You may also want to check:
- Rent-to-buy option. You can sometimes arrange with an individual owner or developer to rent a home that's for sale, with your monthly payments counting toward the purchase price when you are able to buy.
- Gifts. The FHA has introduced a variation on the traditional bridal registry, to encourage a couple's family and friends to put money aside for a down payment on a home bought with an FHA mortgage. It may not be a perfect solution, but it can be a good start toward eventual ownership.
- Auctions. Home auctions, often designed to move property that hasn't sold or has been repossessed by a lender, often mean you can get a good price. If your bid is accepted, however, you may need to make a substantial down payment on the spot.