What do you get when you mix low mortgage interest rates, weak real estate prices and increasing foreclosures? You might get the perfect opportunity to buy a home. And this truth is not lost in my own circle of friends. I have one friend who writes me weekly about how terrible the property market is, but I know he’s excited about the prospects of buying in at some point.
Sure, times continue to be very uncertain, but there’s that aforementioned trifecta of factors aligning here to assist serious homebuyers with cash and savings who are ready to enter the marketplace. I think it’s possible to get a great deal, if you know how to shop.
How To Make The Best Home Buying Decision: Ask These Questions First!
While it’s the American Dream to own a home, it’s not always THE best path for everyone, for the simple reason that not everyone can afford it. Forget what the subprime mortgage lenders told you 4 or 5 years ago — not everyone can be a homeowner. It just won’t make sense in the long run if you think that your house will serve as your retirement fund or piggy bank for the future. The days of fast rising home valuations are now over. So before you start making open house calls, it’s good to take a step back and ask yourself a few questions.
1. Can you afford it?
Don’t just use “low mortgage rates” as an excuse to go house shopping. Face a mirror and be honest with yourself: can you handle it if rates soar in the future? Assess your cash flow and debt situation today and into the future. Don’t just jump at a real estate opportunity just because mortgage rates are so low and tempting. Determine a comfortable real estate price range by using a simple formula; lenders may use this rule to get some idea of the amount of mortgage money that home buyers might qualify for.
Formula: (Monthly Income – Existing Monthly Debt) / 3 = Maximum Monthly Mortgage (You Can Afford)
For more information, check out how to calculate your debt to income ratio to see how healthy your finances are. In addition, be aware of the true costs of home ownership before making this kind of huge financial commitment. If you’re ready to move anyway, then get pre-approved for a mortgage before you go home shopping. It makes the process easier when you find the house you want to buy. It also lets realtors and homeowners know the bottom line about what you can afford.
2. Are there other housing options that make better financial sense?
There are several exogenous factors — again, the low rate lending climate, your credit history and score (which can affect your loan status), your financing options, the size of your down payment, projected housing costs — which you can use to compare home ownership against other living arrangements. Should you rent or buy? You need to compare different living and lifestyle options before you proceed.
3. Do you have money for a down payment?
Most lenders want a down payment of 20 percent or more. This can hold many people back from buying a home. While some real estate investors or “experts” advocate engaging in maximum leverage, it’s not something I am personally comfortable doing. So before plunging into a home purchase, I am the type who makes sure that I’ve got enough savings for a down payment. Still, if you don’t have the money, there are programs out there to help you become a homeowner. I’ll list them here, but this is not something I’d personally pursue, since I eschew creative financing by principle:
- Private mortgage insurance, known as PMI, allows you to make a down payment of less than 20 percent. The lender agrees to lend you more than 80 percent by insuring the remaining percentage on your behalf. Often you need to pay up three to six months of your mortgage payment upfront with a PMI fee on your monthly mortgage. When you are at 20 percent equity, the PMI is dropped.
- Piggyback loans are secondary loans beyond your primary mortgage loan. Buyers can get two loans – one for the mortgage and one for the down payment. Piggyback loans carry a higher interest rate and are typically extended for ten years. Buyers should beware of getting in over their heads by carrying two loans. If you can’t afford any down payment, can you really afford the home?
- The Department of Urban Development (HUD) offers a down payment assistance program. It works much like a piggyback loan except the rates are lower.
- FHA loans can be secured by low income home buyers with a down payment of as little as 3.5 percent. The property must meet the FHA eligibility criteria.
- No down payment loans are available for veterans and military members through VA approved lenders. Even second time home buyers can use this option to find a house. This is a good opportunity for homeowners who need to downsize.
Even Foreclosures and Handyman Specials Can Be Out Of Reach
There are other ways to get in over your head besides a big mortgage loan with high interest rates. While foreclosures and handyman specials can be excellent deals, you must carefully weigh the work and costs involved. A lot of people may miscalculate the expenses involved with working with a fixer-upper, and sometimes, even committing to such a purchase can be too much of a stretch. Just because a house is selling for what seems like a song doesn’t mean that it’s really the deal that you think it is.
Here’s a story I’d like to share: at one point, my friends had purchased a handyman special. With the sellers driven to pre-foreclosure, they thought they’d buy this house for a great price. It was a spacious place with a huge yard and was selling at a great low price. How could they pass this up?
Nowadays, they still reside in their home, but it looks a lot more like work and a lot less like heaven. Unexpected health problems in their family made it tough to maintain a large home. And ironically, they’ve also found themselves in a pre-foreclosure situation… and remain in their handyman special, almost ten years later.
So before you make a home buying decision, make sure you consider the costs involved very carefully. Your house isn’t a bargain if you lose it a few years later to foreclosure!
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