Real Estate Investing

My father’s wisdom suggested that because buying a home is a long-term investment--you should buy as much home as you can possibly afford. And that general opinion has been in place for a good number of years, and even up to today. Think of your home as an investment, they said. Well look over the sales data for the last 5 or 6 years--some investment that was. But this is now, and the question is, what makes sense for today? I say, buy all the home you need, but draw the line there. Over the long haul, home values generally increase and so it is possible to build equity over time, but that depends largely on what you paid for the home, how robust your market is, and how long you occupy the home. When all the stars are in alignment, your home MAY be a good investment, but don’t buy your new home as an investment, buy it as the best place to live for you and your family. Sometimes you have to sell off your investments, that can be painful enough--but it really hurts when you have to sell off your residence. To choose the right home, you have to try to see as far into the future as possible: How long will you likely live in the home? How large is your family likely to grow? What activities will you have and what space requirements? Where do you want to live – near work, near family, in a certain school district? These questions are a way of trying to figure the number of bedrooms, baths and living areas you want as well as other features you want your home to have. Woodworkers always want a shop, artists want a studio, and chefs want a fancy kitchen. You probably know what you will want in a house, but it’s a good thing to discuss with your spouse. I have sent people who were really undecided on their needs home with the assignment to have some wine and decide what they want. Now it’s time to look at affordability. How much can you buy, and how much home can you get for your money? The trick with buying a home is getting as much as you can on your wish list without becoming “house poor.” House poor means you can afford your house payments but you can’t afford to do anything else. House poor can sneak up on you if unforeseen expenses come your way, or if you refinance to cover the cost of a college education, and suddenly have much bigger living expenses. That’s why lenders have a conforming loan standard that they use as a benchmark for pre-qualifying you as a borrower. This is true whether you’re a first-time home buyer or a millionaire move-up buyer. To qualify you, lenders use two ratios – income to mortgage debt, and income to total debt. To qualify for a 30-year fixed rate conforming loan that is federally insured, your income to mortgage debt can be no higher than 29% of your gross annual income, and your debts plus mortgage payment can be no higher than 41% of your gross monthly income. An easy way to “ball-park” what you can afford is to take your total annual income from all sources, and multiply times three. That means that if you make $3000 gross income per month, ( $3,000 a month is $36,000 a year, times 3 is $108,000. You should think that $108,000 is your maximum purchase.) Under the banks conforming loan standard, your house payment (principal, interest, insurance and taxes) should be no larger than $870.00. If you’re carrying credit card debt, student loans, or pay child support, the monthly debt service must be accounted for. To get the income to total debt ratio, multiply your monthly income by 41%. If you make $3000, your total debt including your house payment can be no larger than $1,230.00. That means to qualify for a $870.00 house payment, your debt service can be no higher than $360 per month. This formula is time-tested, and it’s designed to help you minimize the risk of home buying by making sure you can afford your payments over time. Qualifying to buy a home is only the first step. You will want to be able to handle whatever home expenses come your way - repairs, rising utilities, remodeling or other updates, and ongoing maintenance. If you’re relocating, and believe you’ll only be living in your home three to four years, a fixed-rate loan may cost more than you need. You may be better off with a hybrid loan sometimes called a 5-25 or a 7-23. That’s a 30 year loan that gives you a lower fixed rate for the first few years, and then adjusts after that. Talk to your lender and see what you can qualify for before you go shopping for a home. Get a pre-qualification letter and give a copy to your Realtor to help with negotiations. Lock in your rate, so you can calculate your payments and obligations accurately. If mortgage interest rates go up, that could impact the amount your lender will loan you. If you qualify for a smaller amount, consider buying a smaller home or a home in a less expensive neighborhood. It’s really about affordability. The more comfortable your payments are, the more likely you are to enjoy your new home. Dane Hahn is a real estate professional serving Florida's Sarasota and Charlotte Counties. You can reach him at dane.hahn@gmail.com, or by phone at 941-681-0312. See him on the web at www.danesellsflorida.com