Home ownership is the cornerstone of the American Dream. But
before you start looking, consider a number of things.
First, look at buying a home as a lifestyle investment and only
secondly as a financial investment. Over time, buying a home can be
a good way to build equity. But as recent history has shown, house
prices can go down as well as up. Like many other investments, real
estate prices can fluctuate considerably. If you aren't ready to
settle down in one spot for a few years, you probably should defer
buying a home until you are. If you are ready to take the plunge,
you'll need to determine how much you can spend and where you want
to live.
How Much House Can You Afford?
Most people, especially first-time buyers, must take out a
mortgage to buy a home. To qualify for a mortgage, the borrower
generally needs to meet two ratio requirements that are industry
standards: the housing expense ratio and the total obligations
ratio.
- The housing expense ratio compares basic
monthly housing costs to the buyer's gross monthly income (before
taxes and other deductions). Basic costs include monthly mortgage,
insurance, and property taxes. Income includes any steady cash
flow, including salary, self-employment income, pensions, child
support, or alimony payments. For a conventional loan, your monthly
housing cost should not exceed 28% of your monthly gross
income.
- The total obligations ratio is the percentage
of income required to service all your total monthly payments.
Monthly payments on student loans, installment loans, and credit
card balances older than 10 months are added to basic housing costs
and then divided by gross income. Your total monthly debt payments,
including basic housing costs, should not exceed 36%.
In addition to qualifying for a mortgage, you will likely need a
down payment. Down payment requirements vary from more than 20% to
as low as 0% for some Veterans Administration (VA) loans. Down
payments of 20% or more generally buy a better rate and exempt you
from buying private mortgage insurance.
Closing Costs
Closing costs vary considerably, but typically add between 3%
and 8% to your purchase price. Such costs include home inspection
costs, loan origination fees, up-front "points" (prepaid interest),
application fees, appraisal fee, survey, title search and title
insurance, first month's homeowner's insurance, recording fees, and
attorney's fees. In many locales, transfer taxes are assessed.
Finally, adjustments for heating oil or property taxes already paid
by the sellers will be included in your final costs.
| Typical Home Buying
Costs |
| Down Payment |
0%-20% of purchase price |
| Home Inspection |
$200-$500 |
| Points |
$1,000 and up for 1%-3% |
| Closing Costs |
3%-8% of purchase price |
Operating Costs
In addition to mortgage payments, there are other costs
associated with home ownership. Home association fees, utilities,
heat, property taxes, repairs, insurance, services such as trash or
snow removal, landscaping, assessments, and replacement of
appliances are the major costs incurred. Check the actual expenses
of the previous owners and make sure you understand how much you
are willing and able to spend on such items.
Once you've determined a price range and location, you're ready
to look at individual homes. Remember that much of a home's value
is derived from the values of those surrounding it. Since the
average residency in a house is seven years, consider the qualities
that will be attractive to future buyers as well as those
attractive to you. The more research you do today, the better your
decision will look in the years to come.
