for $165,000. I couldn’t afford that amount with my car note and other bills. I wanted to enjoy the home and not have to struggle every month.”
Sperling crunched the numbers using an online mortgage lending calculator, using his $700 monthly rent as the base. “I could go up $100 to $150 more a month for a mortgage.” He also took into account Fulton County’s high property taxes. In the end, Sperling remained true to himself—his mortgage is $810 a month.
Owning a home is only part of Sperling’s wealth-building strategy. He contributes 5% (which his employer matches) of his $45,000 annual salary to his company’s 401(k) plan, and saves at least $200 a month. He also realizes his town house is a starter home. “I plan to live here for three to five years and then keep it as an investment property and rent it out.”
- Know your credit situation. Sperling learned from Robertson that he would need a credit score of 680 or above to qualify for a mortgage at a good rate. However, more stringent lenders look at credit scores in the 700 range. Payment history accounts for 35% of your credit score, so pay your bills on time even if it’s just the minimum. Always keep your credit card balances at 32% or less than your available credit limit.
- Know what you can afford. As of Oct. 1, 2008, the government abolished down payment assistance programs administered through FHA. No longer can home buyers qualify for 100% financing or use alternative documentation on which they could formerly simply state earnings and not need to verify income or assets. Credit requirements have tightened over the last year or so, but for those borrowers who have maintained their credit, there are still several products available.
- Know your price range. What’s your debt-to-income ratio? This is derived by dividing the amount of money you earn by the amount of money you owe. By FHA lending standards, you can’t have more than a 43% debt-to-income ratio, but aim for 36% or even less. Don’t be persuaded by your real estate agent to exceed your limit and buy above your means. Remember, you’ll be the one paying the mortgage.
- Know your options. In general you should lock in a fixed-rate loan. If you’re moving to Atlanta, for example, for a short-term work assignment, and you know you’re going to be in a home for three years, a five-year adjustable rate mortgage may be an option. However, part of the housing crisis is due to people getting ARMs, says Robertson. They were accustomed to paying one rate but couldn’t afford it once that rate went up. If you intend to live in a home for more than five years, get a fixed-rate loan—rates are still at historical lows, 5.64% (at press time). Go to www.bankrate.com to view nationwide interest rates.
The 10 Wealth for Life Principles
1. I will live within my means.
2. I will maximize my income potential through education and training.
3. I will effectively manage my budget,