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Utilities. Repairs. Maintenance. Know what you can spend without breaking the family budget
By Mary Beth Breckenridge and Betty Lin-Fisher
Beacon Journal staff writers
Published on Sunday, May 18, 2008
Now might be a great time to buy your first home.
The market is bloated with houses for sale. Many sellers, eager to move up and tired of waiting, are willing to negotiate. And while interest rates have risen lately, they're still at enticing levels.
It could be the opportune time to become a homeowner if you're ready. That's a big if, because the fallout from the foreclosure crisis has brought stricter loan qualifications that make it harder to borrow money.
Beacon Journal reporters Betty Lin-Fisher and Mary Beth Breckenridge have developed a series of stories to help first-time home buyers determine whether they're ready for homeownership and guide them through the steps involved in searching for, financing and purchasing a home. The intention is to help buyers avoid the mistakes that led to the recent wave of foreclosures and find homes that fit both their needs and their budgets.
----------------Can you afford to buy a house?
Maybe.
Can you afford to own a house?
That's another matter.
The cost of homeownership is more than a mortgage payment, taxes and insurance. It involves expenses such as regular maintenance, unexpected repairs, utilities and even a lawn mower and the gas to run it — expenses that can squeeze your pocketbook.
General wisdom says a mortgage loan should amount to no more than 2 to 21/2 times your annual income. There's also a rule of thumb that says the sum of your housing costs — loan payment, property taxes, homeowner's insurance and private mortgage insurance, which you'll have to pay if your down payment is too small — should take no more than one-third of your monthly gross income.
But those are just baselines, said Steve Baughman, a housing specialist with the Fair Housing Contact Service in Akron. Children, health issues, even an old clunker that needs replacement can all cut into the money available to put into a house.
So if you want to buy your dream house and keep it, it's wise to make the effort upfront to figure out how much you can spend without breaking your budget.
That kind of effort might have made all the difference for some of the people caught in the foreclosure crisis, experts say.
In too many cases, easy credit allowed people to take on too much debt, leaving them with nothing extra to pay for the emergencies that inevitably arose.
''I think we're an instant-gratification society. I think we've taught our first-time home buyers that they're entitled to live the way it took their mom and dad 30 to 40 years to live, and we're making a mistake,'' said Mary Schoenfeld, vice president/manager of American Eagle Mortgage Corp. in Akron and chairwoman of the Summit County Office of Consumer Affairs board.
What can you afford?
Figuring out what you can reasonably afford involves looking closely at your income, your spending habits, your savings, your credit situation and even your likelihood of getting raises or facing new expenses, such as replacing a car or adding to your family.
Once you've come up with a number, stick with it. Don't get excited if lenders say you qualify for more, as they very well might, housing and credit counselors caution. The lenders are basing that on a limited amount of information. You're the only one who knows your full financial picture. Painting that picture takes time and work, the counselors concede, but the effort you make now could save you heartache and financial strain down the road.
You don't need to go it alone, however. Homeownership programs and credit counselors are available to guide you through the process. The Center for Homeownership at East Akron Neighborhood Development Corp., for example, provides its services for free to anyone, regardless of income.
Start preparing early, housing and credit counselors say — six months or even a year in advance of buying a house, particularly if your credit is less than stellar. It takes time to adjust spending habits and improve your credit situation, one of the key factors in getting a home loan with favorable terms.
A good place to start is by checking your credit report. This is a record of your credit history, which lenders use to determine whether to make you a loan and at what terms. In general, the better your credit history, the lower the interest rate you'll get.
Check your credit report
Check your report well before you start looking at houses or shopping for lenders, advised Rich Call, vice president of housing for Consumer Credit Counseling Service. ''You certainly don't want to get yourself so excited about home buying and then . . . find out you've got some (credit) issues to take care of,'' he said.
Make sure your credit report contains no errors, which could hurt your chances of getting a good loan. If you find mistakes, contact the credit bureau to get them corrected.
Along with your credit report, you can obtain your credit score, which is a ranking that indicates to lenders how good or bad a credit risk you are. Generally, you have to pay extra for it, but it's a fairly exact indicator of your credit worthiness. The most commonly used credit score is the FICO score, and it ranges from 300 to 850, with higher being better.
Lots of things can lower your credit score, such as late or missed payments, high credit balances, too many credit cards and even ignored traffic tickets. But take heart: If you've started early, you have time to address those issues before you shop for a loan.
Another important step in determining what you can afford to spend on a house is making a budget, housing and credit counselors say. That involves determining how much money comes in and how much goes out each month, so you have a clear picture of your financial situation.
The more honest and accurate you are in developing your budget, the more useful it will be, Baughman said. Spend a week or, better yet, a month or two tracking every expense, right down to that pack of gum and your morning coffee from Starbucks.
A budget not only tells you where you stand; it also helps you identify places where you might cut back to save for a down payment, Baughman said. Maybe you can downgrade to basic cable, for example, or perhaps eliminate your regular manicures.
Credit and home-buying counselors can often help you create a budget. Another resource is the Better Business Bureau's article BBBTips on How to Develop a Working Budget at http://www.bbb.org/alerts/finance.asp.
Consumer-credit counselor Call even recommended spending six months living as though you're already making a house payment. Estimate how much you'll be spending monthly for all the expenses related to owning a house, subtract your current rent and put the rest into savings each month. Then live on what's left of your income.
That should give you time to discover how reasonable those housing expenses are. As a bonus, you'll end up with a nice little pot of money to put toward the down payment or keep tucked away for emergencies, Call said.
One useful tool in determining how much debt you can afford to shoulder is a mortgage calculator, said Cindy Flaherty, director of special projects with the Ohio Housing Finance Agency in Columbus. You can find calculators online easily.
Don't forget that you'll need to have money upfront for expenses related to buying a home, said Toya Kelker, a housing counselor with the East Akron Neighborhood Development Corp.'s Center for Homeownership. The biggest is a down payment, but there are other expenses you should anticipate, such as a home inspection, a mover or moving truck rental and the cost of furnishing and decorating your new home.
Most lenders require the buyer to put down 3 to 5 percent of the cost of the house upfront, Kelker said. And some say more is better.
''You can never go wrong with having equity in your house,'' Call said. ''That's your cushion. That's your saving net. That's your emergency fund if you have a line of credit tied to it.''
Money in savings helps
If you want to get into a house with no or little down payment, make sure you have the equivalent amount in a savings account, Call recommended.
It's not a bad idea to figure in the intangibles. What would happen if one spouse lost a job or became ill? Would you be able to keep up with your payments and still maintain your lifestyle? What are the taxes for the community and school district? Will you be able to afford increases?
Your goal, the experts say, should be to find a house that serves your needs but still lets you enjoy life.
''I always say, 'You don't want to become house poor,' '' said Carla Herbert, a Realtor and president of Harvest Home Realty. If there's not enough left over for pizza on a Friday night, that can strain the family and makes members resent the house, she said.
That might mean reining in your expectations, the experts say.
Remember that it's your first home, and you can always upgrade in a few years, Call said.
Schoenfeld agreed.
''A first home should be a home of need, not a home of want,'' she said. '' . . . In your second home, you can start wanting and demanding, but not in your first home.''
Mary Beth Breckenridge can be reached at 330-996-3756 or mbrecken@thebeaconjournal.com.
Betty Lin-Fisher can be reached at 330-996-3724 or blinfisher@thebeaconjournal.com.
Now might be a great time to buy your first home.
Get the full article here.
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