Buying Your First Home
by Ryan Shaffer
| Depending on where you live, how far along you are with school, and how old you are, everyone reaches the point of considering home ownership at a different time. But anlong with thoughts of comfort and accomplishment, most of us consider this step with a certain amount of worry, dought, and fear. There is much to consider, but when the timing is right, this anxiety-ridden step can become one of your best memories. |
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Owning vs. Renting
For the most part, the advantages of owning a home are clearly promoted as outweighing the benefits of renting. After all, when you purchase a home you gain equity—you now have an investment that increases in value as you pay down the mortgage. You also get real estate tax deductions each year, a home’s value appreciates with time, and you can increase the value of your investment as you see fit through renovations and good upkeep.
The choice, however, is not always so cut-and-dry for younger, first-time buyers. There is usually no long-term benefit to paying rent because the money you pay each month goes to a landlord and does not serve as an investment. There are situations, though, were renting may be the better choice.
If you’re only going to be in a certain location for less than two years, depending on the rate of appreciation in that area you could actually end up losing equity if you buy and sell in too short a period of time. Renting may also be a wise choice if you need time to check out neighborhoods and schools.
And keep in mind how much free time you have. If you’re in school or graduate school, even if you can afford a monthly mortgage, you may not have time for maintenance. There’s not going to be a landlord around to mow your lawn or fix your leaky faucet.
Buying a home can be advantageous, just make sure your timing and finances are in line.
What Can You Afford?
In our Latter-day Saint culture we often hear of the perils of pride. Unfortunately though, even the wise counsel of our leaders doesn’t always deter us from the silly desire to keep up with the Joneses. Make it a goal with your new spouse right from the start that you will always do your best to live well within your means, and stick to that goal like glue as you begin your house hunt.
With that in mind, how much house you can afford is typically connected to how much money the bank will loan you. But don’t let this be the determining factor; deciding how much you can afford should depend on your lifestyle, spending habits, current and foreseeable debts (Children on the way? More student loans?), and other factors.
Start by getting yourself prequalified or preapproved for a loan. Prequalification is free because it provides lenders the opportunity to market their services. In either case, the lender will add up your assets, run the numbers through a formula, and tell you how much you can afford to borrow (the process is much more thorough when getting preapproved, because with preapproval the lender has already committed to giving the money if everything works out successfully).
Most lenders use a 28/36 ratio to determine what homebuyers can afford. That is, the “28” is the estimate that 28 percent of your income will go toward a mortgage payment. The “36” factors in all of your debts, such as a car payment, school loans, credit cards, etc.
For example, if you and your spouse jointly have a monthly gross income of $4,000, then multiply the $4,000 by .28 (for the first calculation), which means you would qualify for a monthly loan up to $1,120.
For the second number in the ratio, take your $4,000 monthly income and multiply it by .36, with the result being $1,440. Then, add up your other monthly debts (we’ll use $500 in this case) and subtract that amount from the $1,440. That gives you a monthly mortgage payment of $940, so you would probably be allowed to borrow about $150,000. Your lender will probably do both calculations and give you a loan based on the lower of the two amounts.
There are quite a few "how much home can we afford" online calculators (try [bankrate.com] or [homefair.com]). Test them a few times, factoring in various budgeting circumstances, and you'll have a much better idea of your ballpark.
Just remember: Less can quickly become more if you are conservative. Besides, who needs one more room to clean or another ten yards of grass to mow (at least at this point in your lives)?
Down Payments and Closing Costs
Getting approved for a loan is only the beginning. Next you need to scrape together money for a down payment and closing costs—the part of the process most first-time buyers note as being the most difficult.
Begin by making a detailed assessment of everything you own—stocks, assets (cars, jewelry, mutual funds, etc.), CDs, bonds, savings accounts, etc. Unless your millionaire grandpa was a firm believer in trust funds, it’s probably not much, but as long as you have a reliable income, that doesn’t necessarily mean you can’t afford a home. The real estate industry has made the process easier for beginners by offering a variety of down payment options.
The industry rule used to be twenty percent down, but low-down-payment loans (those less than twenty percent) are now more common. You can purchase a home with nothing down, less than twenty percent down, or whatever percentage amount you and your lender negotiate.
However, the less you put down, the less equity you’ll have, the higher interest rate you’ll be paying, the more monthly fees you’ll have from a lender in order to cover the risk, and the more debt you’ll have (and we all know that the sooner we’re completely out of debt, the better). The general rule then is: Carefully budget, factor in long-term interest amounts, make sure this really is the right step at the right time, and if it is, put down as much as you can while still allowing you to save for the future and emergencies.
Now closing costs: They vary from about two to seven percent of a home’s total value. They sneak up on you, so be prepared. Some closing costs might include: a loan application fee, appraisal fee, credit report fee, lender’s processing fee, title insurance, an escrow account, recording fees, inspection fees . . . unfortunately, the list keeps going. Even before you know exactly what your fees will be, just start saving for them.
Deciding Where and What
Choosing where you live probably depends on either school or work (or both) for now. The main decision, then, becomes one of city, suburb, small neighboring town, or rural. Start making a list of what’s important to you: a short commute, good preschool, nice parks, plenty of cultural and recreational activities, etc.
You should also start making a list of home amenities you “need” and “want.” You’re not going to get everything you want this time around, but it’s important to note the aspects that are particularly important to you (maybe you need space for a home business, or a yard that will allow for a dog, for example).
The challenge now becomes marrying the where (location) and the what (house amenities) with your budget and loan possibilities. This is when thinking outside the box comes in handy. A home, even one you own, doesn’t necessarily have to be a house. It could also be a townhome, duplex, or condominium, and there are advantages and disadvantages with each. These options allow you to still be a homeowner, at lower costs.
Joining together all these factors into finding the right home is all about prioritizing. You and your spouse will have to decide which of your wishes is most important.
Real estate agents are experienced in helping you find homes that best fulfill your wishes and fit within your budget. Especially if inexperienced in the home-buying process, you’ll probably find that using an agent or realtor is a very helpful option. Besides, it’s the seller that pays a commission percentage for having a home listed through an agency, not the buyer, so while there will be some fees involved, what they can offer you as an inexperienced buyer is probably worth the relatively small cost. Ask for a good referral from friends or family, and choose an agent or broker who is a member of the National Association of Realtors, which requires members to be licensed and to uphold an ethics code.
Because this process is so closely tied to the welfare of your family, it is undoubtedly nerve-wracking. Don’t forget to include the Lord as you start making these choices, and then take comfort that when combined with research and preparation, finding the right first home can be a step that will end in some of your greatest early memories as a new family.
LDS Living Magazine
