Smart Moves
????But what if you’re not Donald Trump? What if you’re an average wage-earner like the rest of us? The answer remains the same. It’s still a great time to buy, for many of the same reasons: plenty of inventory, exciting incentives, historically low interest rates and extremely motivated sellers.
????Plus, President Bush has just signed into law H.R. 3221—The Housing and Economic Recovery Act of 2008—which allows first-time buyers to take a $7,500 tax credit for the purchase of a home. You can read more about it elsewhere in this special section.?
????Conditions are especially favorable in Jacksonville, which was recently ranked No. 8 on a Forbes Magazine list of the Best Cities for Bargain House Hunters. One reason: There are an estimated 25,000 homes on the market in Northeast Florida, and the excess inventory—both existing homes and new construction—needs to be significantly reduced before builders can gear up again.?
????And there are signs that’s happening, as inventory gradually but steadily decreases and closings gradually but steadily increase. Clearly, relatively low prices are driving much of the activity.
????There are plenty of brand-new homes priced under $200,000—some are even priced as low as the $120s—which is especially good news for first-time buyers and empty nesters.
????Still, even a relatively inexpensive home is the largest single investment most families will ever make. And with the market in a state of flux and so many mixed messages coming from the media, we thought it would be timely to offer objective answers to some commonly asked questions. In case you have further questions, we’ve also included a list of resources.
????Good luck and happy house hunting!
Q. Friends have advised me to wait for the market to recover before buying a house. How will I know when it’s the right time to buy?
A. Actually, the best time to buy is when inventory is high and interest rates are low. That’s now.?
????You can’t possibly time the absolute bottom of the market. Nobody can. Just remind yourself that it’s the strongest buyer’s market in two decades and that Florida remains one of the fastest-growing states in the nation. That means conditions won’t stay this favorable forever.
????Also, buying a home is still a fantastic investment for many families. In fact, experts estimate that home appreciation rates will soon return to historical averages of about 6 percent annually.?
????So if you invest $150,000 in a home today, it will likely appreciate at a rate of $5,000 to $9,000 per year. In five years, that same home should be worth about between $175,000 and $200,000. Unless you’re planning to try and flip your new home for a quick profit, the investment is solid over the long-term.
????Plus mortgage interest rates are likely going to continue to inch up, with some experts predicting 7 percent in 2009. That means there could be a penalty for waiting to buy even if prices slip further.
????For example, at today’s mortgage interest rates, a $250,000 loan costs $1,500 per month. At 7 percent, that same $1,500 payment gets you only a $225,000 loan. So by waiting, you could lose buying power.
Q. My family and I are ready to own our first home, but we’ve heard that mortgages are hard to get right now. How much should we plan to invest and how should we go about getting financing?
A. It’s true that lenders are more cautious about giving loans than they were a year ago. But it’s still their job to lend money and there are plenty of mortgage opportunities to be had.?
????Getting pre-approved, by contacting banks and mortgage companies before you actually put an offer on a home, is the best way to find out if you qualify and for how much. It can also make the buying process easier to have financing lined up.?
????First, look at your monthly gross income, before taxes and contributions. This is how much you make per month, not how much you take home. What you take home is net income.
????Lenders use what’s known as a front-end ratio, which is computed as a percentage of your gross monthly income. The front-end ratio signifies the payment a buyer can reasonably afford, from a lender’s point of view. You may prefer a lower payment.?
????The front-end ratio for a Federal Housing Adminstration (FHA) loan is 29 percent. For a conforming conventional loan it’s 33 percent.?
????This means if your monthly gross income is $4,000, to qualify for an FHA loan, your monthly principal, interest, taxes and insurance (PITI) payment could be no more than $1,160. For a conventional loan, it could be no more than $1,320.?
????The back-end ratio reflects your new mortgage payment, plus all recurring debt. It, too, is computed on your gross monthly income. The back-end ratio is higher than the front-end ratio.?
????For an FHA loan, the back-end ratio is 41 percent. For a conforming conventional loan, it’s 45 percent. This means if your car payment is $300, and you pay $100 a month between two credit cards, your total monthly recurring debt is $400.?
????On the hypothetical FHA loan payment above of $1,160 PITI, plus $400 recurring debt, your total is $1,560. The back-end ratio number is $1,640 ($4,000 times 41 percent equals $1,640.) Your total monthly obligation is less than $1,640, so you would qualify for an FHA loan.?
????For a conventional loan, $4,000 times 45 percent equals $1,800. The total debt of $400, plus your new mortgage payment of $1,320 equals $1,720. Your total monthly obligation is still less than $1,800, so you would qualify for a conventional loan.
Q. How much should my down payment be?
A. A down payment is a percentage of your home purchase price that you pay up front. Typical down payments range from 5 to 20 percent. Under current lending conditions, being able to put down at least 10 percent can increase your chances of getting a mortgage.?
????But there are a number of programs, including several offered by FHA, through which loans are available to first-time and low-income homebuyers requiring down payments of just 3 percent.
????There are also programs available that require no down payment.
????Veterans Administration (VA) loans, for example, are available with no money down while other programs allow gift down payments if certain criteria are met.
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Q. But my credit has a few blemishes. Can I still get a mortgage?
A. Sure. Very few people have absolutely perfect credit. But you need to find out your credit score and clear up any outstanding issues to get your score as high as possible.
????If your score is 750 or above, you’re golden. You’ll probably get the best interest rates and mortgage terms with a score in this range. Scores of 700 or above are considered somewhere between very good and excellent, so you’ll have no problem if you’re anywhere within that range.?
????If you’re closer to 600, most lenders will still consider you to be a reasonably qualified borrower. Below 600 is tougher—you’ll likely still be able to get a loan, but not at the most favorable rate.