Make sure buying home is feasible
Costs shouldn't exceed 28% of income

July 30, 2006, Detroit Free Press, Republished in this blog by Ralph Marcus Maupin, Jr. (Mark)
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BY JEFF BROWN

PHILADELPHIA INQUIRER

Dear Jeff: I am 26 years old, engaged and renting an apartment. I wanted to see whether I can afford to buy a home. I make $60,000 a year and have little money for a down payment.

Dear Reader: Buying a home is a good financial move for the long term but might not make sense if your life is likely to change a lot in the next few years -- if, say, you will start a family and need more space.

As a renter, you can be pretty sure your housing costs will continue to rise with inflation.

If you buy, you'd still have monthly payments for interest on the mortgage, plus principal, the portion of the loan you pay back every month. But these two costs would be fixed for the life of the loan, so you'd avoid the kind of annual increases you're likely to face as a renter.

Of course, as an owner you would be paying for homeowner's insurance and property tax, too, and those are likely to go up with inflation. And you'd shoulder all the maintenance and repair costs that fall on your landlord now.

But if you bought now, it's almost certain you'd pay less for housing in five or 10 years than if you rented a comparable property. Also, you'd gradually pay off your mortgage and the home's value is likely to rise over time. So you'd build equity, the difference between the property's value and what you owe..

However, it costs money to sell a property. The commission paid to the real estate agent runs to 5% or 6% of the sales price. Moreover, though home values have gone up a lot in recent years, they do level off sometimes -- or drop, though that's usually temporary.

So there's no guarantee you could buy a home now and sell it in a year or two for enough to pay off your mortgage and cover the sales commission and any other costs related to selling, such as repairs. I'd be very cautious about buying unless I thought I'd keep the property for at least three to five years.
As a rule of thumb, lenders want an applicant's monthly payment for principal, interest, tax and insurance to come to no more than 28% of gross income. They don't want your total debt burden -- those housing costs plus payments on car and student loans, credit cards and so on -- to equal more than 36% of gross income.
Assuming you have no debts now and could find a mortgage charging around 6.5%, you probably could borrow around $160,000. Obviously, you could borrow more if your fiancee has an income, too, and you buy together.

Typically, home buyers make down payments of 10% of the sales price. But some lenders will require only 5%, some even less. And there are many federal and state programs that assist first-time buyers.

To check these, go to the Web site of the U.S. Department of Housing and Urban Development, www.hud.gov/buying/index.cfm.
The phone book's yellow pages list real estate agents and mortgage brokers who can help you find good mortgage deals. Shop for mortgages at www.bankrate.com and try keying "zero down payment" into your Web browser. Be careful that a low or zero down payment deal doesn't come with a high interest rate.
In addition, look at for-sale listings in the paper and at www.realtor.com, site of the National Association of Realtors. The site has a set of calculators to help you figure things such as how much you can borrow and whether renting or buying make the most financial sense.

JEFF BROWN is a business columnist for the Philadelphia Inquirer. Contact him at brownj@phillynews.com.