What is your
Add up your fixed expenses, including a prospective mortgage, property taxes, closing costs and insurance.
“It’s easy to forget all these other costs, but it’s important to make sure you budget for them,” Padilla said. “You have to factor them in to make sure you can afford it.”
How much cash do you have left? “You always want to keep six months of living expenses in cash, so if you lose your job, you have enough to live on for six months,” Horowitz said.
If your income fluctuates, make sure you have the cash reserves to dip into if you have a pay drop.
Determine your savings rate by looking at how much income you are putting away after expenses. Horowitz said it should be five to 10 percent. If you can’t put away that much, you need to re-evaluate housing options.
Do you qualify financially?
To buy, lenders want no more than 28 percent of your income going to housing costs, and your debt should be no more than a third of your income, Padilla said.
“You have to look beyond today,” he said. “Will your financial picture change — do you have student debt or other obligations? Will you be able to handle the payment in the future?”
If you are a couple, make sure you can cover the mortgage with only one of your salaries, in case one of you loses a job, said Cheung, who is also a Realtor.
In this economic climate, realize that some lenders are skittish and a little finicky, she said. One client, a real estate lawyer who made more than $250,000 annually, couldn’t get a loan because the condo association where she wanted to buy was involved in litigation. “Lenders are looking for reasons not to lend,” Cheung said.
Well-to-do clients with healthy assets also are being turned down for loans because they are retired and have no income, Horowitz said. “Lenders are pretty tight,” he said.
If you can’t afford the 20 percent down payment typically required, there are Federal Housing Administration, or FHA, loans that offer attractive down payments for first-time homeowners, as low as 3.5 percent. But you and the property you buy have to qualify, and you still have to buy Private Mortgage Insurance, called PMI, to protect the lender in case you can’t make your payments.
“And a lot of condos don’t qualify for FHA loans,” Horowitz said.
How long do you plan to stay?
To buy, you should be prepared to stay in a house for three to five years to recoup your up front and closing costs, Padilla said. “It was that fact that didn’t make me feel comfortable with the commitment” of buying, he said. “I didn’t know where we would end up.”
Padilla has a client couple in their early 30s who also are struggling with renting versus buying. The woman, a pharmacist, and the man, a consultant finishing his master’s degree, have the potential to double their income in the next year.
“They are asking themselves — ‘Is the house we can afford to buy now the one we want to stay in? Or should we wait?’ ” Padilla said.
It may make sense for them to rent for a year in their desired neighborhood, then re-evaluate, he said.
How’s your credit?