Wednesday, September 5, 2007

What Can I Afford?

Everyone would agree that the most important factor in purchasing a home is money. Whether you are buying purely for investment or because you become emotionally attached to a home and are thinking more of quality of life, it all comes down to money. We are currently in a state of crisis because over the past few years lenders have been passing out loans like candy, and unfortunately not everyone could actually afford the loan they were given. The first broker I worked with used to say, "All you have to do to get a home loan these days is fog a mirror!" It looks like that is changing now, but only because an estimated 2 million adjustable rate mortgages are scheduled to reset this year. Of course not all of these will default, but many borrowers with poor credit who had already pushed their income to debt ratio to the limit will certainly be over their heads. Who's to blame for this problem? Some say the consumer and other say the lender. Of course, both hold some responsibility. The buyer needs to be sure they understand the terms of the loan. READ THE FINE PRINT! You need a loan consultant you trust! I received a phone call a few months ago from a man who needed help trying to figure out if he should sell his home or buy his ex wife out. I did some research into the title and found that he owed more than he did at the time of purchase. This was news to him, and although they weren't in a default position as they could afford to make the payments, he could not afford to sell the home as he owed more than the home would have been worth on the open market. He had a negative amortized loan and had been making the minimum payment each month without realizing that this caused the loan balance to increase over time. He didn't know; wasn't told. Should he have read the documents more carefully? Sure, but I believe that is called predatory lending. English also happened to be his second language.

So how much can you afford? As I mentioned before, banks have tightened requirements. You need to have good credit and a minimum of 10% down, but most importantly you need to decide how much you can comfortably afford to pay each month. Many times people qualify for more than they actually want to pay. Once you have a comfortable monthly payment amount in mind remember that amount needs to include not only the loan payment but also property tax (1.14% in San Francisco) and home owner's insurance (home association dues if you are purchasing a condominium). One other cost to consider when you are going to purchase a home is closing costs. On average, closing costs are 1.5% to 3% of the purchase price. They can be higher if you are paying points (prepaid interest) to lower the interest rate on your loan. Closing costs for the buyer include lender's fees, escrow fees, title insurance, and inspection costs. Closing costs are not taken out of the down payment; they are a separate cost. This is probably the largest purchase you will ever make (aside from your second or third home of course). Take your time. Surround yourself with a good team , don't over extend yourself, relax, and enjoy your new home.

No comments: