Buying a house : mortgage

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How much house can I afford?  If you’re thinking about buying a house, the question of a mortgage is probably occupying your thoughts right now.  You’re wondering how much money a traditional lender (like a bank) will give you—and what information will be used to get that figure?

The second part of that question is easy to answer.  They will use everything they can obtain about your finances:  Factors will include your income and recent income tax returns, existing debt service, and credit score.  (Your credit score will also significantly influence your interest rate; a high credit score should make you eligible for lower interest.)  They may also want to review your spending patterns and how often you change jobs and residences.  (They are looking for reliability and stability.)  —Here’s something that may surprise you:  Lending institutions do not favor people who have a lot unused credit.  They are concerned that it will be abused in the future.

If you cannot supply the required information, it is quite possible you will be denied a mortgage for just that reason.  Neither does having all the figures guarantee approval.  The lending institution will see how your financial profile fits within a set of “rules” that determine how much of a mortgage you can afford (and that, for all practical purposes, defines how much house you can buy).

The rules are actually a set of percentages (of your gross income—that’s your income before taxes are taken out) used to figure the maximum you would be offered as a mortgage loan.  Although some lenders allow a very small variance, if your percentages are greater than those of the rules it’s becoming standard to offer you less (and perhaps at a higher interest rate) or, quite possibly, decline your application.

There are three rules (all based on maximum considerations).  The following is a summary of these rules:

1)      Monthly Mortgage Payment—The Rule of 28:  Your monthly mortgage 

payment should not be greater than 28% of your gross monthly income.

This number is simple to figure:  Divide your gross annual income by 12

and multiply your answer by 28%.  So, if you have a gross annual income

of $60,000 your mortgage payment should not be greater than $1,400

(60,000/12 = 5,000 x .28 = 1,400).

2)      Total Monthly Housing Payment—The Rule of 32:  The monthly average of all bills directly related to your housing payment should not be greater than 32% of your gross monthly income.  In addition to your mortgage payment, these are bills associated with housing—any mortgage insurance, homeowners insurance (including insurances covering specific occurrences like flood or hurricane), property taxes and HOA fees.  (This is where lenders may allow that small variance I mentioned earlier.  Some will allow 33% for these bills.) Based on a gross annual income of $60,000 your average monthly bills related to and including your mortgage need to be no greater than $1,600—certainly no more than $1,650.  And yes, a few dollars does make a difference to a lender.

3)      Monthly Debt Service Payment—The Rule of 40:  The required minimum monthly payments for your outstanding debts may not be greater than 40% of you gross monthly income.  This includes your mortgage and related bills, loans of any type—student, auto, etc.—and credit card payments.  (This explains why lending institutions do not want you to have much unused credit.)  Note:  This figure does not include utility bills.  (They are usually accrued and paid in full, cyclically.)  Based on that gross annual income of $60,000 with a monthly gross income of $5,000, at 40% your total monthly debt service should be no greater than $2,000—and of course the majority of that will be dedicated to housing.

Thinking about that Rule of 40 can be a bit deceptive.  Using the figures I’ve given you, $5,000 minus $2,000 leaves $3,000—right?   No, it does not.  Since the $5,000 indicated is gross monthly income, taxes and other deductions have to come out as well as all your living expenses—food, utilities, fuel, car maintenance, insurances (car, health, life…), savings, entertainment...  The list is practically endless.  Your money is not.  Lending institutions want to offer you the largest loan they can.  Your figures may make the maximum prohibitive.  Regardless, you may want to consider (1) reducing your monthly bills and (2) reducing the amount of money you want borrow.  This may mean reducing the amount of house you buy, but living better in it.  Or, you could wait to buy until you have large down payment.  The bank will give you as much money as its policies allow in order to make as much money as they can on the interest you pay.  You don’t want buying a house to lead to financial hardship.  You want to get a mortgage that will allow you to feel good in the house you buy.

Mortgage for your new house mortgage

As you put your plan together for buying a house, you have a lot to think about.  Financing is a major issue.  And, of course, most of us think mortgage when we think of financing.  In the past mortgages were fairly easy to obtain.  Recently, however, lending institutions have become considerably more conservative.  Many people may find the requirements for securing a mortgage so inflexible that they become discouraged—willing (too easily) to abandon their dream.

Rather than giving up, consider alternatives to a traditional mortgage.  Certain forms of creative financing are really not uncommon.  You may already be familiar with the terminology:

1)      Seller Carryback Loan

2)      Seller Second Mortgage

3)      Lease-To-Own

4)      Subject To Existing Financing

These forms of financing involve motivated sellers.  They tend be short-term solutions that can put a buyer into position to get a traditional mortgage.  I’ll discuss mortgages and these other financing methods in detail in later posts. Buying a house

Buying a House How to buy a house home

You’re planning on buying a house!  What will make a suitable home for you?  We all have our dreams—the mansion on the mountain, the rose arbor and white picket fence, the little cabin in the woods, a modern condo…  We’re sure that owning the ideal house will take us a long way on the road to the perfect life.  But, you already have a life and if you are honest, you’ll admit that your ideals sometimes don’t fit well in your reality.  Instead of dreaming, you should be strategically thinking about the issues involved in buying and then owning the building or space you want to make into your home.

Of course, everybody knows that it takes money to buy a house.  We also know that most of that money will be financed.  (I’ll address that in another post.  Insurances, taxes, and utilities are subjects for later, too.)  The issues I want to discuss in this post have financial significance, but they are initially connected to emotions, lifestyle, and practicality.  Owning a house really puts you in partnership with a building.  And, as in any relationship, there needs to be an analysis of the assets (and the baggage) belonging to each party before the union becomes permanent.

Your ability to endure a long-term commitment is probably a good place to start. —There is that major financial obligation involved in buying a house.  Many factors can influence your ability (and willingness) to make that payment every month for (maybe) 30 years.  For example, is your job stable?  If you lost it, would you be able to continue making your house payments?  For how long?  Foreclosure will affect your credit for a very long time.  What happens if you get a promotion or your dream job really does become available—on the other side of the country?  Are you going to be happy (or could you even manage) living in a dumpy little apartment while the house you leave behind sits waiting for a buyer? (And, it sits empty while you still make those monthly payments.)  What if you just have plain old wanderlust?  (How many times have you moved when your lease was up?)  People used to figure they could turn a profit on a house if they lived in it for 5 or 6 years.  Now it may take ten or more.

How much space do you need to live comfortably?  And, what kind of lifestyle do you have?   Are you a homebody?  Could you work from home?  Do you want to entertain a crowd—frequently (or maybe never)?  What phase of life are you in?  Is your family likely to grow in the next few years? —I’m not just thinking about babies.  Is it likely an adult child could return home because of divorce or job loss?  What about aging parents? These questions are among the factors you want to think about when you consider the size and style of house you’re interested in.  Not everyone can run up and down stairs all day long.  Not everyone needs a house with four or six bedrooms and three baths.  Not everyone needs a formal living room and a family room.  Not everyone needs a gourmet kitchen or a complete office suite in the house.  But, some people do.  We need to think about how we normally live.  If we have too little room or too few amenities, we’re uncomfortable (and we can become quite obnoxious if we get too uncomfortable).  When we have too much, we’re in danger of becoming slaves to our house.  Think about heating space you never use.  If you rarely have company, it might be economical when you do have guests to rent a place at a nearby resort or stay at a hotel rather than paying for rooms that are closed up most of the time.  How do you feel about maintaining a yard when you have too many allergies to enjoy it?   One maxim says, “The things you own, own you.”

When it comes to maintenance, do you have the skills and are you willing to spend the time it takes to do the work yourself?  If not, can you afford to pay someone to do it for you?  If you think a Victorian is a suitable home for you, keep in mind that a grand old house need lots of TLC.  And that doesn’t mean you get off easy if you buy new; all houses require preventative maintenance.  Are you interested in a sleek new condo?  Many of those come with a staff that does scheduled maintenance and someone may be on call 24/7.  Most are also governed by a type of home owners association.  Maintenance fees are charged regularly (whether you need to take advantage of the services, or not) and depending on the repair, you can still be financially responsible—in part or in full.  As for a condo that doesn’t have a home owner’s association?  Just try to get all your neighbors to agree to a new roof if your unit is the only one with a leak.

The building won’t be your only maintenance consideration.  Appliances wear out too.  It’s not easy to cook three meals a day for a family of five on a two-burner hot plate while you save money so you can afford to replace the stove.

Furnishings are another issue.  Do you own enough to fill a house?  Or, are you going to have to do it piece by piece.  (That can be fun—or exasperating—depending on your ability to tolerate half-finished projects.  It will be expensive.  And will you stop when it’s appropriate or go on to clutter?)  It’s also possible that you already own too much furniture.  Downsizing can also be pleasant or stressful.  For some people possessions are like old friends and parting with them hurts.

Then there’s the yard.  Most homeowners have one (apartment-style condos being the usual exception).  Often there is a neighborhood HOA that sets (and can legally enforce) certain standards.  As a homeowner, either you will be devoting time to yard work or you’ll pay someone else to do it.  One perk that comes from doing it yourself: You’ll probably get to know the neighbors and may develop a sense of community.  Having friendly neighbors was common in the past, but at least one generation has lived with housing styles and amenities (attached garages, privacy fences, entertainment systems, etc.) that encourage cocooning.  And many have had the money to pay gardeners.  That’s.changing.  We still need our yards to look good, but money is tighter, so we’re getting out and taking care of them ourselves.  It’s costing us time, but we may be enjoying them more.

Talk about neighbors brings to mind “the neighborhood.”  If you buy a house, with rare exception (I’m thinking of a very isolated farm or woodland setting), it’s going to be in one.  Even when you are looking at an apartment-style condominium you have to consider the building a neighborhood.  Regardless the type of house you want to buy, you need to consider the area surrounding it.  Are the homes and yards well kept?  What’s the crime rate?  Is shopping convenient?  What about mass transportation?  Can you afford to drive to work?  People sometimes fall in love with a particular house or area and dismiss the impact of its location.  You don’t want to do that.  When you’re buying a house you need to be willing to live with its neighborhood.

Schools are another contributing element to the quality of a neighborhood and so to the value of a house.  If you have children, you are very interested in the caliber of education offered.  If you do not have children, you may not consider it to be important.  If you are a curmudgeon, you might even resent the feet that stray into your yard and the noisy chatter of students as they pass by.  (Actually, these intrusions happen much less than we think.  Most children are chauffeured to school by a parent or bus.)  Anyway, back to the presence of schools:  Even if you will not be taking advantage of them, schools affect the resale value of your house—and that you do want to consider.

Here is another other topic I want to broach: Renovation.  Unless you are purposely looking for a fixer upper—in which case, I’m sure you’ve already started counting the cost in time and money—you are thinking, “What?  I haven’t even bought the house yet!”  But, from the time a house is built, renovation looms.  It goes back to the neighborhood.  Neighborhoods are rarely in stasis.  They are either improving or in decline.  To maintain or add to the value of their property homeowners renovate.  You’ll want your house to at least reflect the neighborhood standard.  It won’t be “keeping up with the Jones.”  It’s an effort to increase your net worth.  Again, (someday) when your house goes back on the market, you’ll want it to have increased in value and to be appealing to prospective buyers.

Dreaming has a place when you’re getting ready to make a home.  Thinking and planning take precedence in buying a house.  A home will provide you with rest, refreshment, and refuge from the world.  A home is made within some type of housing.   Your building and property supply the place to make your home.  You supply the care, time, and finances required to make it enjoyable.