While these are uncertain economic times, financial experts agree that owning a home is still a key cornerstone in accumulating assets that are likely to appreciate over time. Real estate moves in cycles with its ups and downs.
News stories about a national subprime mayhem and skyrocketing home foreclosures could frighten anyone from buying a house these days. But the housing crisis has actually created an environment that is ideal for first time homebuyers.
With home prices and interest rates dropping, coupled with the federal government’s focus on helping first-time homebuyers, there are plenty of great opportunities available, says Robert L. Robertson, vice president of operations in the Atlanta division of GMFS Lending. “Homes are more affordable now. So, houses that use to cost $150,000 to $200,000 may now sell for $100,000. National average mortgage rates are around 4.5% to 4.8%.” Robertson adds that unlike in recent years, there is a large inventory of homes available to buyers giving them many choices and even room to negotiate in some cases.
However, though the time may be right to buy, the biggest mistake you can make is to rush. “Go out, seek, and find a home, but take your time,” Robertson advises. Use due diligence because changes are taking place in the market almost daily.”
There are also favorable tax breaks that come with being a homeowner. Both mortgage interest and property taxes are deductible.
Working in first-time homebuyers’ favor is President Barack Obama’s stimulus package, which offers an $8,000 tax credit for anyone who buys their first home before Dec. 1, 2009. President Obama’s Homeowner Affordability and Stability Plan offers two incentives for homeowners to refinance their homes in order to take advantage of historically low interest rates. One is meant to help those who have less than 20% equity in their homes — or own more than the home is worth — and the other is designed to help lower monthly mortgage payments.
It stills boils down to credit in terms of what type of loan you qualify for and what type of home you can buy, say financial gurus. The unrestrained lending of yesteryear has been replaced by more restrictive traditional standards. Meaning, you need a credit score of at least 700, you must prove your income stability, and you need to have a down payment of 10% to 20% in order to secure favorable home loan options.
There are still variable alternatives to traditional loans such as buying HUD homes which require low down payments and provide 100% financing for those who qualify. FHA or government-insured loans require 3.5% down and credit score around 620, but then homebuyers may have to pay a year’s worth of mortgage insurance premiums up front to land that first home. A mortgage lender will be able to help you determine if you qualify and what grant programs are available in your area.
Also, you should be aware of the home expense you can afford, says Robertson. If you make $25,000, you most likely can’t afford a $300,000 home no matter what anyone tells you.
Get pre-qualified for a home loan by a lender before you begin your search. To get a pre-approved loan, a lender will look at your income, your debts, your credit rating, and other factors. As a rule of thumb, you can get a mortgage up to 2.75 times your income. You don’t have to get the maximum amount you qualify for, Robertson adds. Typically, you want to keep housing expenses (mortgage, taxes, and insurance or home association fee) to 25% of your gross annual income.
Do your homework in choosing a bank or mortgage broker. Go with whoever offers you the best deal in terms of interest rates and processing fees. Just make sure you work with a lender you can trust to do the right thing for you. A responsible lender will work with you to determine what you can afford as a monthly mortgage payment, rather than trying to fit you into a loan that is above your means.
Further Reading: 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, Credit, Debt, and Tax Obligations
4. I Will Save At Least 10% of My Income
5. I Will Use Homeownership as a Foundation For Building Wealth
6. I Will Devise An Investment Plan For My Retirement Needs And Childrens’ Education
7. I Will Ensure That My Entire Family Adheres To Sensible Money Management Principles
8. I Will Support the Creation and Growth of Minority-Owned Businesses
9. I Will Guarantee My Wealth Is Passed On To Future Generations Through Proper Insurance And Estate Planning
10. I Will Strengthen My Community Through Philanthropy