Buying Your Home ~ What You Can Afford
How much does my real estate agent need to know?
Real estate agents would say that the more you tell them, the better they can negotiate on your behalf. However, the degree of trust you have with an agent may depend upon their legal obligation. Agents working for buyers have three possible choices: They can represent the buyer exclusively (single agency), represent the seller exclusively (sub-agency), or represent both the buyer and seller (dual-agency). Some states require agents to disclose all possible agency relationships before they enter into a residential real estate transaction. Here is a summary of the three basic types:
- In a traditional relationship, real estate agents and brokers have a fiduciary relationship to the seller. Be aware that the seller pays the commission of both brokers, not just the one who lists and shows the property, but also to the sub- broker, who brings the ready, willing and able buyer to the table.
- Dual agency exists if two agents working for the same broker represent the buyer and seller in a transaction. A potential conflict of interest is created if the listing agent has advance knowledge of another buyer's offer. Therefore, the law states that a dual agent shall not disclose to the buyer that the seller will accept less than the list price, or disclose to the seller that the buyer will pay more than the offer price, without express written permission.
- A buyer also can hire his or her own agent who will represent the buyer's interests exclusively. A buyer's agent usually must be paid out of the buyer's own pocket but the buyer can trust them with financial information, knowing it will not be transmitted to the other broker and ultimately to the seller.
A standard ratio used by lenders limits the mortgage payment to 28% of the borrower's gross income and the mortgage payment, combined with all other debts, to 36% of the total. The fact that some loan applicants are accustomed to spending 40% of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income. You will want to contact a trusted mortgage loan originator to find out what type of mortgage programs you may qualify for.
In general, lenders don't want borrowers to spend more than 28% of their gross income per month on a mortgage payment or more than 36% on debts. It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and pre-qualify you for a loan. The price you can afford to pay for a home will depend on several factors:
- Gross income
- The amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
- Your outstanding debts
- Your credit history
- The type of mortgage you select
- Current interest rates
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. This ratio should fall between 28% to 33%, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34% to 38% range.
When is the best time to buy?
Here are some frequently cited reasons for buying a house:
- You need a tax break. The mortgage interest deduction can make home ownership very appealing.
- You are not counting on price appreciation in the short term.
- You can afford the monthly payments.
- You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10% of the sales price.
- You prefer to be an owner rather than a renter.
- You can handle the maintenance expenses and headaches.
- You are not greatly concerned by dips in home values.
A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards. Just give us a call and we would be more than happy to provide local market statistics to you.
What is Fannie Mae's low-down program?
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income. To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97% financing on a fixed-rate mortgage with either a 25 or 30 year loan term through Fannie Mae's Community Home Buyers Program. Fannie Mae's new Start-Up Mortgage will assist buyers with a 5% down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers will receive a 30 year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment loan programs.
How do you determine the value of a troubled property?
Buyers considering a foreclosure property should obtain as much information as possible from the lender, including the range of bids expected. It also is important to examine the property. If you are unable to get into a foreclosure property, check with surrounding neighbors about the property's condition. It also is possible to do your own cost comparison through researching comparable properties recorded at local county recorder's and assessor's offices, or through Internet sites specializing in property records.