REAL ESTATE: So You Want To Buy A Home Pt. 2


AaronAvatar_1.jpgBY AARON STELLA Never buy your first home for love; buy it for money. Embracing this maxim will maximize the considerable benefits of first-time home ownership. As I mentioned in our last edition, people don’t typically buy a home until they’re ready to settle down, and it’s this mindset that prevents many people from home owning and securing wealth until later in life. Your dream home doesn’t have to be your first; make it your fourth, and by that point you should be able to buy it in cash.

After I got serious about buying my first home, I had to assess whether or not I was eligible for a mortgage. To do this, I went to a mortgage broker who ran me through a mortgage pre-approval, which determines two things: one, how expensive a home I can purchase, and two, whether or not I meet the minimum requirements to acquire a mortgage. The type of loan I sought was an FHA loan (Federal Housing Administration). Due to recent market conditions, most first time home buyers opt for FHA loans since it requires the least money down (3.5% of the total purchase price, compared to the 5%, 10% or 20% down required by other types of loans). In addition to the 3.5% down, you must also have a credit score of at least 620 and two consecutive years work experience in the same field. If you meet those requirements, the mortgage broker will assess your debt-to-income ratios. Da-Da-Dum! Now now, don’t get caught up in all the numbers. Like I said in our last edition, getting mortgages are just like trying to get juiced up student loans. So let’s take this step-by-step.

Credit: Luckily enough, by time you get done with college, you’re credit score is usually healthy and untarnished, so long that you didn’t (ahem) spend yourself into oblivion on Chinese take-out and Red Bull. I did, however, apply for two credit cards and bought pizza on them once a week, and paid them off monthly, which gave my score a little more beef than the average grad by graduation time.

Work Experience: I received a BA in English at Temple, and now perform writing-based tasks for CITYSPACE. According to a lender, I have four years of work experience under my belt in the English/writing field by merit of my college education. If I’d changed jobs from, say, magician to UFC cage fighter to underwater basket weaver to Storm Trooper in the past two years, no matter how qualified a Storm Trooper I might have been or how much money the Galactic Empire paid me, if I don’t have two consecutive years of documented experience as a Storm Trooper that lux-condo on the Death Star will just have to wait. Still, good mortgage brokers have been known to work a bit of magic (especially for the Galactic Empire) so don’t lose hope altogether if you’ve only been a highly paid Storm Trooper for a year or so.

Debt-to-Income Ratio:
Unfortunately, my student loans did not help my debt-to-income ratios. Now don’t go screaming into the hills because of the numbers. Trust me, it’s not as bad as it seems. So, the prerequisites for an FHA loan dictate that a borrower can spend no more than 43.5% of their gross monthly income — after subtracting monthly debts — on their mortgage. This fixture is used to lower the risk of the borrowers defaulting and to help them maintain their quality of life (I’m looking at you, big spender). So, let’s say you make $2,500/month gross, and your total debt is $300/month (student loans, car loans, credit cards, etc.). Energy bills, cell phone bills, and your membership to the polar bear club do not factor in. After subtracting the $300/month, you’re left with $2,200/month to play with. Now, take 43.5% of $2,200/month, which works out to you being able spend up to $957/month max on your mortgage.

Still awake? Now to see how much of a mortgage you’re eligible for, using this savvy equation here: for every $100,000 you borrow, expect to pay around $600/month for the mortgage, which means, if FHA guidelines allows you to spend a maximum of $957/month on a mortgage, then you can afford to borrow a little under $160,000. Now, just because 160K defines your max doesn’t mean you should go running to purchase a 160K home. Believe it or not, you can get a finished home for much less than 160K in a good part of town, when you’re making, what, $32,500 a year? The house will probably have a couple of bedrooms you could rent out, allowing you to potentially live for free and still collect on all the tax breaks. Not a bad deal. Not bad at all.

Well, that about covers the process for mortgage pre-approval process. We’ll get deeper into the mortgage process in later editions. Keep in mind everyone’s situation is different: there are a plethora of variables that determine how much your mortgage payment will be, and what type of mortgage is best for you; however, now you have a base of knowledge from which you can approach acquiring a mortgage, and, more importantly, house hunting, which we’ll be covering in our next edition. So stay tuned, folks. We’ll be back with more.


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