Choosing To Buy

Can I afford to buy my first home?

For a lot of people home ownership is a part of their game plan. We all grew up in a society that promotes the ‘American dream’ in which home ownership is a widely accepted token of achievement and as a first time home buyer or someone considering becoming a first time home buyer the aforementioned question is likely to be running through your mind. Whether you are a 20 something or a baby boomer considering your first home there are some basic considerations to keep in mind as you start down the path to becoming a first time home owner.

Is renting going to be a better option for you?

What are you paying in rent right now, is it an amount that is equal to or greater than the cost of paying a mortgage on a house equally desirable as the one you are in now? If the answer is yes then most likely, you can afford to buy a home but not necessarily. Do you have money saved up for a down payment on a loan? If not, it would serve you well to start saving your pennies and putting away as much money as possible for a down payment.

If you answered no, that doesn’t mean that you’re out of the running either. You may be paying a large sum of money on a home that is realistically more home than you need. Could you downsize and still be content in your living situation? If you could stand to live in a smaller or less desirable home and make that same payment toward a loan home ownership might be a great choice for you. Why? Think about this, every month you right out that check for your rent you are paying an expense to which your only return is a place to live. Now think about if you were to write that check as a payment into an investment. When you pay that amount to a loan you are paying into two things, interest and principle. Paying interest is not all bad, you can write it off in your taxes. Paying into principal is also not a bad thing because as you pay more principal you build greater equity in your home which translates into a higher return on investment if you sell your home.

Can you afford to take on expenses for property taxes, insurance and home repairs?

If you can stand to take on a 1.25% property tax and the cost of home owner’s insurance and any possible home repairs then, once again, you should buy. Home ownership and the associated cost is not conclusive at the time of purchase, rather it is inclusive to that cost and the future cost of ownership. If you have enough money to set aside and pay for your living expenses, mortgage and budget some extra cash for the future costs of owning a home then you’re off to a great start. If not then you may need to rework your budget, perhaps you don’t take that Hawaiian vacation this year and use that money toward a new roof. Is that worth it to you to have your own place?

Do you have money set aside for closing costs?

When you buy a home you are going to have associated costs for purchasing the home for things such as inspections, title insurance, transfer fees, document preparation fees, escrow fees and loan fees. Generally these expenses do not exceed 3% but that can vary.

Conventional calculators are available online.

You can do a Google search and find a number of calculators that will help you with conventional analysis of whether or not you can afford to buy. The one thing that they all have in common is that they look at a balance between your front ratio, your monthly housing expenses vs. your gross monthly income, and your back ratio, your total cost of monthly expenses vs. your gross monthly income. The generally accepted ratios are 28% and 36% respectively. A great example of one of these calculators can be found on Ginnie Mae’s website. Ginnie Mae is a government entity that makes home ownership possible by providing investors a safe and timely payment on funding loans via Mortgage Backed Securities. For more information you can visit their informational site.

There are many other considerations to take into account that your Realtor® should be able to help you with. A couple of those might be, is your family growing, is your job condition stable, improving or deteriorating, can you get a gift of funds, do you expect an increase in expenses and whether or not you anticipate relocating in the near future.

When is a good time to buy?

There is no straight forward answer for this question.The truth is that this question varies depending on each person’s situation and all of the many variables that play into the scenario. That being said, let’s discuss a few things that you should make sure are in place before you decide to buy or not. Affordability, market conditions, your current state of living and your timeframe for purchase are a few good starting points for you to consider.

Affordability is a major factor. You can visit my previous blog entitled Can I afford to buy my first home? to get a start on determining whether or not your are financially ready to buy. Financial readiness depends on things such as job security, your current and anticipated expenses and a myriad of variables. In short if you can afford to tack a mortgage payment onto your monthly expenses then affordability shouldn’t be a factor to stop you from buying a home. You may find, however, that you can’t afford to buy the home you want. If that is the case you will need to decide whether or not you are choosing to buy as an investment to build some equity and upgrade homes in a few years or if you are buying a home with the anticipation of staying there for a long period of time.

Market conditions are constantly shifting and the reality of it all is this. There will always be somebody telling you that it is either a “buyer’s market” or a “seller’s market” but that doesn’t necessarily rain true for you. If you are renting a house now, you can afford to pay a mortgage and you have a baby with two more on the way but your house can’t accommodate that many people, it’s probably safe to say that you need to move. If it you can afford to move, does it really matter if values aren’t appreciating at record highs or that home prices are high? That’s your call.

The reality of it all is that there is not universal rule that says just because prices are at all time lows you should buy. Perhaps you can qualify to buy a home at those low costs but just barely. Is it really a good idea? What would happen if you held on to your cash for a down payment, saved for a year longer and then looked at getting a loan? Could you now buy a home that may not be the best but you bought just for the sake of owning but is something that you really would enjoy living in.

Current living situations come into play when we discuss your current employment, familial status and geographic location. If your career forecast isn’t looking too good there is a good chance that waiting won’t be a bad decision. On the other hand, if your job is going great and you are in line for a promotion with greater pay; it might be a great time for you to buy.

When we consider your familial status it really pays to consider where you will be in a year or more down the road. Suppose you are a single bachelor looking at buying a 2 bedroom condo. Are you planning on having a family in the next few years? If so it would probably be a good idea to take into consideration the size of the condo and whether or not you will have enough room for a family. If you can’t afford to buy a condo that meets those criteria on your single income, waiting for a spouse and a second income to be able to purchase the appropriate home could be a better game plan for you.

Geographic location comes into play along the lines of employment. Considering where you will be in the next few years should also help you decide if it’s time to buy. If you anticipate a move in the near future you need to consider what the cost of buying and selling a house will be. If the costs are not enough to deter you from making that purchase, awesome! Pick up the phone and call your agent. Chances are though, the cost is going to be significant and home ownership may not be right for you at this time.

Time is on your side. If you are on a schedule that lets you take your time picking through properties then buying now may not be the best solution. If you need to get move because your lease is coming due and you don’t want to renew it or find a new place, my guess is that you should be buying if the aforementioned criteria have been met. Having a flexible timeline is going to be beneficial to you as far as providing you a chance to shop the market a bit for a good home that fits your needs. Speaking of market, what if the market is moving quickly? For a while there the homes were flying off the shelves and offers were pouring in on short sale and foreclosed properties. As a buyer, are you ready to move quickly on an offer for a home? Some buyers don’t want to have to respond to those market conditions and the pressure of moving so quickly. If that sounds like you then you will find that sitting on the sideline will probably let you ride out the rush and you will still be able to buy a home, it just might not be right away.

These are just a few thoughts that I share with clients when they come into my office and tell me that they are looking to buy their first home. The question of, “Is it the right time for me to buy a home?” is common and like I said earlier. Each person has a unique situation and an equally unique answer. Feel free to call me or e-mail and we can discuss your situation.

How long will the home buying process take?

Generally speaking in today’s market you can expect to spend a minimum of 2 months for the process of buying a home, minimum. The 2 month time period is based on a 45 day escrow period and you and your agent coming together to find you a sweet home right off the bat. Due to the fact that there are generally other factors that affect the total time period I would venture to say that the average motivated home buyer in my market, San Luis Obispo County, can expect to spend 3-4 months to buy a property.

I base that assumption on a time period of an agent spending about a month showing a buyer potential homes that meet their criterion and that a buyer is ready and eager to buy a home. I have seen buyers that motivated but a lot of times I spend 3 months looking at properties with a buyer before we find the right property that fits their budget, style tastes and neighborhood expectations.

Another assumption that should be factored into the timeline is the actual purchase contract and escrow time period. A pretty quick escrow is closing in 45 days right now on homes with a buyer using conventional or FHA loans. As such contracts are being drawn up with that in mind. Why is the time period so long? It is a multi-faceted answer to that question starting with the fact that most buyers order home inspections, pest inspections and are subject to appraisals to get their loans. As a side note: I encourage all of my buyers to have those two inspections ordered at the very least so that they know if there are any material issues that affect the quality or value of the home.

When the pest inspection comes back it may come back with a list of repairs that should be addressed by the buyer and or seller so that the home is delivered to the buyer in good condition. The home inspection will likely come back like the pest inspection. Each contract is different but for the sake of simplicity, the common practice is for a request for repairs to be submitted so that the conditions affecting the property are remedied prior to the funding of the loan. The reason for this is so that the underwriter for the loan is confident that the property is a sound investment of their money and that the buyer will have a good property.

The appraisal is another item that the underwriter will want to see to prove that the home is being purchased at a reasonable price and is a sound investment. Once the appraisal comes back and is reviewed and the underwriter and parties of the contract can remove the contingencies and have all of the repair work signed off and completed the loan will generally be funded and escrow can close. At the close of escrow you will become a home owner and the process of purchasing is complete and the journey of home ownership begins.

While this is a brief overview of the process and explanation of a general time period it is a pretty good start to understanding the sale. If something in here strikes you as interesting don’t hesitate to shoot me a comment, below, or email me and I will be glad to discuss the process in greater detail.

Considerations before meeting a real estate agent?

Before you meet up with a new agent you can take a few considerations to mind and be better prepared to provide information that will make the process of identifying a good agent more smooth. 9 times out of 10 when you meet with an agent to interview them they will be interviewing you as well, we are trained to qualify buyers for our own reasons too. Mainly to make sure that we are working with people that truly are interested in buying a property and not out for a free tour of the town.

Some things that will make you look like a pro to any agent are knowing your timelines for buying, your wants and needs in a property, knowing the local neighborhoods that you’re interested in, having your financial information organized and being sure that you are ready to buy. While those may seem simple enough they can make a world of difference.

Knowing your timelines

Knowing your timelines will be helpful in today’s market especially since we have a large percentage of sales that are either pre foreclosure or foreclosed properties, both of which can vary in time to close from 45 days to a year or more. If you go into your interview expecting to be in a home in less than 60 days you need to fully understand that this is a difficult, not impossible, task now days and that you will need to work very closely with your agent. Along those lines your agent needs to be somebody willing to hustle their tail off and be in close contact with you on the whole deal. Get on the same page about this from day one.

Have an idea of what you want and need in your ideal home

Spend some time thinking about what your ideal home will look like and where it will be located and then start thinking about the details of this home. A lot of times buyers have a general idea of what they like because they watch HGTV shows, visit their friends’ homes, look in the papers etc. but very few of them put those ideas on paper. Once you feel like you are getting a pretty good grasp on what your home will look like sit down at the dining room table and write out a list of things that you want and a separate list of what you need. Wants are things that you can live without or easily change like paint colors, raised planters and appliances. Whereas, needs are items such as number of bedrooms or bathrooms in a home, proximity to work gas or electric appliance supply and 1 or 2 stories. Take that list with you to meet your agent for interviews and give it to them so that they have a more clear idea of what you are looking for and won’t waste your time showing you 2 story homes without garages when your biggest requirement is to have a single story home with a 3 car garage because your tired of hiking up stairs from the offsite parking lot at your current rental.

Have a general knowledge of the local neighborhoods

This will help you and your agent to make sure you end up in an area that meets your needs. If you are unsure of what kind of neighborhoods are in your community take a day to get in the car, hop on a bike or simply walk around the different neighborhoods and take notes on what you like or dislike of them. This little homework assignment can not only help identify neighborhoods but introduce you to different architecture, amenities and time periods of when the homes were built. A lot of times neighborhoods are built by a builder that maintains a consistent style with the homes so that they aren’t just a mishmash of nice homes among junk homes or mansions surrounded by shacks. In real estate the old adage “Location, location, location!” is directly correlated to this subject and it’s because consumers are willing to pay more to be away from the railroad station or less to buy on one side of highway than the other. Knowing where you stand on the location matter is very helpful to agents when they are finding you a great property.

Have your financials ready

Even if you don’t have a pre-qualification letter from a lender or any idea of what you can afford have a file that includes copies of your recent paycheck stubs, copies of your last two years W-2 tax statements, a total of your monthly income from all sources including investments as well as a total of all of your monthly expenses. Depending on the agent, they may or may not be willing to help you come up with a value that you can afford to make payments on. Most times they will refer you to a lender to come up with that number simply because a lender is the ultimate decision maker on what they think you can qualify for. It certainly doesn’t hurt to be prepared in advance.

Make sure that you really are ready to buy

Readiness has many different implications including employment, lifestyle, current living situation and future plans. When you are looking into buying a place, your current employment is extremely important. If you are in a stable job that consistently provides you a healthy paycheck then you probably are good to go on a purchase but if your job may be relocating you in the near future, stop and ask yourself if you really are ready to buy. What kind of big changes are coming down the line for you? If you are going to be getting married or have a child for example, those things can affect how prepared you are to deal with the new responsibility associated with buying and owning a home. Your current living situation will also come into play here and ties back into the whole timeline issue if your lease is up in 60 days but you can’t find a property that can close in that time line. You may have to make some adjustments to be ready for a place to stay while closing the deal. Lastly, you might be ready to buy today but what if you wait for another 6 months? 6 months down the road you may get a bonus that could bump up your price point and it just might be worth waiting a little bit longer to pull the trigger. Obviously, we can all wait forever and afford more so make sure that if you’re going to wait longer or pull the trigger today the outcome is justifiable.

Rent vs Buy calculators

For a lot of people home ownership is a part of their game plan. We all grew up in a society that promotes the ‘American dream’ in which homeownership is a widely accepted token of achievement and as a first time home buyer or someone considering becoming a first time home buyer the aforementioned question is likely to be running through your mind. Whether you are a 20 something or a baby boomer considering your first home there are some basic considerations to keep in mind as you start down the path to becoming a first time home owner.

Is renting going to be a better option for you?

Can you afford to take on expenses for property taxes, insurance and home repairs?

Do you have money set aside for closing costs?

Conventional calculators are available online.You can do a Google search and find a number of calculators that will help you with conventional analysis of whether or not you can afford to buy. The one thing that they all have in common is that they look at a balance between your front ratio, your monthly housing expenses vs. your gross monthly income, and your back ratio, your total cost of monthly expenses vs. your gross monthly income. The generally accepted ratios are 28% and 36% respectively. A great example of one of these calculators can be found on Ginnie Mae’s website. Ginnie Mae is a government entity that makes home ownership possible by providing investors a safe and timely payment on funding loans via Mortgage Backed Securities. For more information you can visit their informational site.

Be Sociable, Share!

Dom4SLOHomes on Twitter