Buying 101

If you’re reading this article, chances are you’re considering buying a home. That’s smart. As no less an authority than Donald Trump recently stated: “There’ve been times I advised people to buy real estate and times I’ve advised people not to buy real estate. Right now is a great time to buy, maybe the best time ever.”

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.

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 inch up as the economy improves. 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 qual-ify for an FHA loan, your monthly principal, interest, taxes and insurance (PITI) payment must be no more than $1,160. For a conventional loan, it must 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 also qualify for a conventional loan.

Q. How much should my down payment be?
A. A down payment is a percent-age 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 rquiring down payments of just 3 percent.

There are also programs available that require no down payment.

Veterans Affairs (VA) loans, for example, are available with no money down while other programs allow gift down payments if certain criteria are met.

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 most likely get the best interest rates and mortgage terms with a score in this range. Scores of 700 or higher are considered somewhere between very good and excellent, so you’ll have no problem if you’re anywhere within that range.

If you’re in the mid- to high 600s, 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.

THE TRUTH ABOUT HOME OWNERSHIP’S INVESTMENT VALUE
AS A LONG-TERM INVESTMENT, HOME OWNERSHIP IS STILL ONE OF THE BEST INVESTMENTS FOR INDIVIDUAL HOUSEHOLDS.

You’ve heard it said. But is it still true? After all, the headlines say the housing market is down and out, with defaults rising at an alarming rate and lending institutions closing as a result of bad loans.

What buyers need to realize is that housing markets, like all markets, inevitably have their ups and downs.  And home ownership has a track record that is virtually unmatched by any other purchase in terms of its real benefits.

Despite the turmoil in mortgage lending, if you have good credit, a job and a steady income, you’ll find plenty of mortgage options at good rates. For well-qualified buyers, rates are running at near historical lows.

TAKING THE LONG VIEW
Here are a few examples of why, dollar for dollar, homeownership is a solid stepping stone to a future of financial security and the single largest creator of wealth for many Americans.

Over the long-term, real estate has consistently appreciated even through periodic adjustments in local markets in response to economic conditions. On a national level, home appreciation has historically increased 5-6 percent annually, according to economists at the National Association of Home Builders.

Five percent may not seem much at first, but here’s an example that will put it into perspective: Say you put 10 percent down on a $200,000 home, for an investment of $20,000.

At a 5 percent annual appreciation rate, that $200,000 home would increase in value $10,000 during the first year. Earning $10,000 on an investment of $20,000 is an extraordinary 50 percent annual return.

In contrast, putting that $20,000 down payment into the stock market and getting a 5 percent gain would only yield a $1,000 profit.

HOMES  VERSUS STOCKS
Looking at it another way, over a longer period of time, if you put $10,000 into the stock market in 1996, the average annual S&P return would make that investment worth $21,500 today—an increase of $11,500.

The median home price in 1996 was $140,000. Today, that same home would have gained nearly $100,000 in value.

BUYER RESOURCES

HOME INFORMATION

www.florida-homebuyer.com. Florida Homebuyer Orlando’s Web site contains the most comprehensive database of new-home communities to be found anywhere, and is searchable using an array of criteria.
www.hbaofmetroorlando.com and www.orlrealtor.com. The Home Builders Association of Metro Orlando and the Orlando Regional Realtor Association offer a searchable database of new-home listings.
www.myfloridahomesmls.com. The consumer site from the Multiple Listing Service (MLS) contains virtually all existing homes for sale and is the definitive resource for Realtors. But there’s lots of consumer information as well.
www.zillow.com. This site is fun and informative. Enter your address—or the address of a home you’re coveting—and you’ll get a picture from Google Earth as well as estimated value and other information. See what your neighbors’ homes are worth, too, just for kicks.

MORTGAGE INFORMATION

www.fhagovernmentloans.info. The Web site for the Federal Housing Administration’s (FHA) loan program has everything you need to know about FHA loans and FHA-approved lenders. There’s even an “Ask the Expert” component.
www.freddiemac.com.  Consumers don’t deal directly with Freddie Mac, which buys mortgages from lenders, packages mortgages into securities and sells the securities to investors. But its Web site is an excellent resource for first-time buyers.
www.fanniemae.com. Like Freddie Mac, consumers don’t deal directly with this federally chartered mortgage underwriter. But its Web site helps you find a lender or a housing counselor who can offer advice on buying a new home or on holding on to the home you have.
www.homeloans.va.gov. The Veterans Affairs (VA) Web site outlines home-ownership programs designed specifically for vets—and there are a number of them.