Josephine Godinez, PA
home purchase checklist

Tips for Buying a Home in 2009

April 8, 2009 by Josephine · Leave a Comment 

As I’ve previously noted in earlier posts, there is no question that we are witnessing an increase in home buying activities. While there are some who are simply dipping their toes in to test the waters, I’m finding that most buyers are serious about purchasing a home. Below, please find a few tips for those who are ready to jump in with both feet:

Know What You Want

Before you can truly make strides toward achievement in any aspect of your life, it’s critical that you obtain clarity as to what you really want. The same holds true when shopping for your next home. Are you settling for a starter home in the ‘burbs when what you really want is a condo on the beach? Are you getting ready to start a family and want your children to benefit from the very best schools? Does the privacy and security of a gated community appeal to you? Do you want to cut down on that daily commute and find a place closer to work? Are you willing to be patient in exchange for a bargain basement price as the short sale or foreclosure negotiation process unfolds over the course of weeks and possibly even months?

There are many factors to consider when contemplating the purchase of a home. So many, in fact, that I often find that prospective homeowners fail to consider some things that will ultimately lead to a truly happy ending for them and/or their family. It is for this reason that I always recommend consulting an experienced realtor. Time and again, I’ve seen how helpful it is to a buyer when his or her realtor conducts a thorough needs assessment before searching for properties. Location and price are certainly important, but there is more involved in the making of a successful home purchase.

Know Your Limits

A necessary counterbalance to the concept of knowing what you want is the reality of knowing what you are capable of at any given time. In searching for your next home, it’s important to consider your current needs as well as your anticipated needs five or even ten years down the road. Having said that, you want to stretch for that ideal property but not at the expense of your long-term financial well-being.

According to Jack Guttentag, Professor of Finance Emeritus at the Wharton School of Business at the University of Pennsylvania, there are three different “affordability calculations” which are based on the income rule, the debt rule and the cash rule, respectively.

The income rule says that the borrower’s monthly housing expense (MHE), which is the sum of the mortgage payment, property taxes and home-owner insurance premium, cannot exceed a percentage of the borrower’s income specified by the lender. If this maximum is 28%, for example, and John Smith’s income is $4000, MHE cannot exceed $1120. If taxes and insurance are $200, the maximum mortgage payment is $920. At 7% and 30 years, this payment will support a loan of $138,282. Assuming a 5% down payment, this implies a sale price of $145,561. This is the maximum sale price for Smith using the income rule.

The debt rule says that the borrower’s total housing expense (THE), which is the sum of the MHE plus monthly payments on existing debt, cannot exceed a percentage of the borrower’s income specified by the lender. If this maximum is 36%, for example, the THE for Smith cannot exceed $1440. If taxes and insurance are $200 while existing debt service is $240, the maximum mortgage payment is $1000. At 7% and 30 years, this payment will support a loan of $150,308. Assuming a 5% down payment, this implies a sale price of $158,218. This is the maximum sale price for Smith using the debt rule.

The required cash rule says that the borrower must have cash sufficient to meet the down payment requirement plus other settlement costs. If Smith has $12,000 and the sum of the down payment requirement and other settlement costs are 10% of sale price, then the maximum sale price using the cash rule is $120,000. Since this is the lowest of the three maximums, it is the affordability estimate for Smith.

This affordability calculator link can serve as a guide, but it is recommended that you consult your personal financial adviser before making any final decisions.

Be Prepared

The motto worked for the Boy Scouts of America, so why not for you? Once you have researched your personal purchasing power (home affordability), it’s time to make sure that your credit is clean and clear. Interest rates are at all-time lows, but that doesn’t mean that lenders are giving money away to anyone with a pulse - after all, that’s part of what delivered our economy into its current state of disrepair.

Once you’ve confirmed that you have an acceptable credit score and have reality checked your price range, go to a reputable lender or mortgage broker and obtain a letter of pre-qualification. While this letter doesn’t represent a financial commitment from the lending institution, it does position you as a serious buyer to any seller; be they an individual owner (standard home purchase) or a bank (short sale or foreclosure).

In obtaining the letter of pre-qualification, often you will have to prepare and present evidence of your past employment and related earnings as well as your ability to remain employed into the future. This is a good time to undertake yet another reality check. How are things at work? Stable or spiraling out of control? Do you have any plans to transition into another field in the near future (e.g. pursuing a graduate degree in another discipline), thereby creating the potential need to relocate in order to find work? While we certainly can’t plan for every eventuality, it’s best to take into consideration all those events of significance on the horizon that may impact your future enjoyment of your home purchase decision.

Timing

As I’ve noted several times over the past few months, a perfect storm of opportunity has arrived for those who are in the market for and financially capable of purchasing a home. I’ve run across a few buyers this year who were testing the waters, while attempting to time the market and buy when prices hit rock bottom. This flawed approach cost these prospective buyers homes that were ideal fits based upon their respective needs assessments. Ironically enough, they will likely end up paying more if and when they ever find another perfect fit.

According to a late-2008 consensus survey by PricewaterhouseCoopers and the Urban Land Institute, based on input from more than 600 industry experts, the U.S. residential market is projected to start rebounding appreciably in 2010. The moral of the story is that serious buyers who know what they want and are well-prepared should not be afraid to make the purchase decision. Remember that this is a strategic investmentĀ  in one of the best-performing long-term assets in the history of the U.S. as well as an investment in the happiness of you and your family.

Go get ‘em, tiger!

Josephine Godinez, PA