ConnectLA

Why do you want to buy a home?

• Homeownership is a part of the American dream.
• You want a place for your family to call “home”.
• An investment in an asset that you can pass down to your children.
• You want to begin to build wealth and financial security

What’s stopping you from buying a home?

• Maybe you’re not sure that you know enough. This is a big decision and you may not feel that you have enough information to make a good decision. This website is a good place to start your research!
• You worry you can’t afford to buy a house; don’t have enough money for the down payment
• You have credit issues that you think will prevent you from qualifying for a home loan
• The country is currently in recession and experiencing one of the worst housing crises in history.

Is homeownership right for you?

Owning a home is a big responsibility. It takes time, energy and money—but we think that it is worth the work! As you determine if homeownership is right for you, ask yourself the following questions:

1. Do I have a steady, reliable source of income?
2. Have I been employed regularly for the last 2 years?
3. Do I pay my bills on time?
4. Is my total debt (all credit cards, car loans, etc.) under control? Can I afford those debts and a mortgage?
5. Do I have some money saved for a down payment?
6. Do I have some money saved for closing costs?
7. Can I afford both the mortgage and the other expenses, such as electric, water, repair and maintenance costs?
8. Do I plan to live in the home for at least 2 years—long enough to build some equity?
9. Do I have time to take care of a home—including responsibilities like mowing the lawn and repairing my property when problems pop up?
10. Do I have time to devote to buying a home right now? Or are other commitments, like school or a new business a priority?

Benefits of home ownership

Some people like the flexibility that comes from renting. When you rent, you can live in a neighborhood for as little or as long as you want. You’re also free of most maintenance responsibilities—your landlord usually handles repairs. Yet there are many reasons for owning a home.

Build Equity

In the first few years of paying a mortgage, the majority of your monthly mortgage payments go towards interest on the loan. However, over time, an increasing amount of the monthly payment goes toward reducing the mortgage balance, or “principal.” As you make payments, you reduce the principal and increase your share of “equity” in your home’s value. If your home increases in value through appreciation, your equity will build even faster. Building equity—or savings in your home is important for many people in that it lets them plan for retirement and other future goals.

Gain Tax Advantages

You are allowed to deducted mortgage interest and property taxes from your federal income tax and from your California state income tax. These deductions can mean significant tax savings, especially in the early years of the mortgage when interest makes up most of the monthly payment. After calculating your taxes, you may find that it’s cheaper for you to buy than to rent.

Rely on Payment Stability

If you select a fixed-rate mortgage, you will pay the same monthly principal and interest payment for the term of your loan. Unlike renting, this type of payment will remain the same month after month, even when inflation leads to higher prices. However, your total monthly housing expense could vary if tax and/or insurance expenses change.

Gain a Sense of Community

Owning a home involves you in the welfare of your community. You become invested in the neighborhood and have a stake in making sure that thrives and is a nice place to live. You may feel a greater sense of belonging and permanence by owning your home.
Now you are sure the pros to homeownership outweigh the cons. Next you want to get a clearer idea of what it will take for you to take the next step! ConnectLA wants to give you as much information as possible to equip you to make a good, informed decision.

How Much House Can You Afford?

For a general idea of your buying power, multiply your annual gross income by 2 1/2. For example, if you had a household income of $50,000, you might be able to qualify for a $125,000 home. The actual number may be more or less, depending upon your individual situation, debts and credit history. Mortgage lenders generally use two ratios to help determine how much you can afford to spend each month on mortgage payment. Those two ratios are the Housing Expense Ratio and the Debt-to-Income ratio.

Housing Expense Ratio

As a general guide your monthly mortgage payment should be less than or equal to a percentage of your income, usually 25-30% of your gross monthly income. Using the $50,000 per year income described above, your gross monthly income would be $4167. According to the rules of mortgage lenders, you should be able to handle a mortgage of $1042 (25%) to $1250 (30%) per month. But you need to decide for yourself, based upon your financial responsibilities, if you can live comfortably with the amount of your suggested monthly mortgage payment.

Debt-to-Income Ratio

Your buying power can be affected by factors such as your income, debt and credit history. Your debt, such as credit card bills and car loans, and other expenses such as housing expenses, alimony and child support, should not be more than about 30-40% of your gross income.
Part of your initial preparation in buying a home is to get your debt levels under control. Below are some helpful hints…

• Do not make a large credit purchase (i.e. car, major appliances, etc.) within 12 months of purchasing a home. This increased debt will increase your debt-to-income ratio and make your loan application less desirable to mortgage lenders.
• Set a budget with your estimated mortgage payment. Make sure to include taxes and insurance in your estimated payments. Try the sample monthly budget worksheet from Freddie Mac to help you get started.
• Remember your housing budget should include utility costs and a set aside each month for future home maintenance and repair costs. Some financial advisors recommend saving about $100 per month for home maintenance and repair expenses.
• Make sure that you can meet your other financial goals, such as saving for retirement and paying for college tuition.
• Once you review your finances, select a mortgage amount that allows you to reasonably meet your long-term goals and needs.

How much money do you need to buy a home?

Many people only think about the down payment when purchasing a home. But there are other costs that must also be considered when buying a house. However, you’ll need money for the following:

• Down payment
• Closing Costs
• Other housing-related costs—mortgage payments, maintenance and repair costs

Down Payment

The down payment is a percentage of the value of the property. What percentage that is will be determined by the type of mortgage you select. Down payments usually range from 3 to 20% of the property value. You may be required to have Private Mortgage Insurance (PMI or MI) if your payment is less than 20%.  Most lenders in the current economy are not allowing the low down payments, so expect to pay 10-20% down.

Closing Costs

Closing costs include points, taxes, title insurance, financing costs and items that must be prepaid or escrowed and other settlement costs. These costs generally range between 2-7% of the property value. You will receive an estimate of these costs from your lender after you apply for a mortgage.

Where can you get the money to buy a home?

Money for the down payment and closing costs is one of the biggest impediments for new perspective homeowners. Funds for the down payment can come from some of the following sources:

• Savings account, bonuses and commissions
• Tax refund and Earned Income Tax Credits
• Investments (mutual funds, securities, IRA, 401 (k) or Keogh funds)
• Second/ part-time job
• Individual Development Account (IDA)
• Nonprofit Gift Programs
• Local, state and federal grant programs and subsidized secondary financing
• Gift from family and friends

You can use gift money from a relative towards a portion of your down payment. Some mortgage lenders may require that a certain amount of the down payment come from documented savings that you have accumulated personally. The banks want to ensure that you are personally, financially invested in the purchase. The amount of the gift may be limited in some mortgage programs. Usually the mortgage lender requires a gift letter verifying that the gift is not a loan and that you do not have to repay it.

American Recovery and Reinvestment Act of 2009 (Stimulus Package)—Home Buyer Tax Credit
A tax credit of up to $8,000 is available for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.  Some of the details include:

• The tax credit is for first-time home buyers only.  For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
• The tax credit does not have to be repaid.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The credit is available for home purchased on or after January 1, 2009 and before December 1, 2009.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

For more details about this tax credit, visit the IRS website at http://www.irs.gov/newsroom/article/0,,id=204671,00.html.

So, you’re sure that homeownership is for you. Now what’s next? Let’s find a Real Estate Professional!

Sources: 
Opening the Door to Home, Fannie Mae Foundation 2004
http://www.fanniemae.com/
http://www.freddiemac.com/