A very wise real estate broker I was fortunate to meet more than 40 years ago not only got me interested in selling real estate, but also gave me great advice about buying as much house as you can possibly afford. In a fundamental way, it changed my life, pushing me to buy a home I loved but thought I couldn’t afford.
Today’s millennials are facing the same decisions my husband and I made all those years ago. Should we take the leap into homeownership, spending more than we ever thought we would, or should we play it safe?
As difficult as it is for buyers to find a home in this market, if you do find one and it’s over the top of your price point, don’t discard it. My rule of thumb is if a lender thinks you’re qualified, believe them, even if your parents and friends think you’re nuts. Get into the game now and you’re set for the next 30 years and you won’t be at the mercy of landlords.
Generally, lenders are qualifying buyers based on between a quarter and a third of their monthly gross income on the monthly mortgage payment. That range increases to between 35% and 45% of your monthly gross income if you include maintenance, taxes and insurance. Credit scores are still very important in analyzing credit worthiness, so be ready in the event you have anything on your credit report that is incorrect or needs an explanation.
Finally, first-time buyers are frequently short on cash and may opt for a mortgage down payment of less than 20%. If you are considering this, don’t forget that you will be required to pay mortgage insurance, which will cost from $30 to $70 a month for every $100,000 borrowed. This insurance is for the protection of the lender should you default on the loan before there is a sufficient build-up of equity. It will stay in effect until you have paid enough of the principal to equal equity in the amount of 20% of the home’s value. Also, the mortgage insurance payment will count towards your monthly costs and will be included when qualifying for a mortgage.
Historically, mortgage rates are very low and housing costs are very high. But should buyers sit out the market waiting for prices to come down? Good luck with that; the only time home values went down was after the financial crisis, which was generated by risky mortgage lending and exotic mortgage programs, all of which have been corrected through legislation passed after the crisis.
Even if buyers end up with a mortgage payment they are not totally comfortable with, it’s likely they will grow into the payment. As younger buyers establish careers, the anticipation is their income is likely to rise over time, so while you’re stretching to make those early monthly payments, you’re building equity and long-term wealth. Young buyers also should not discount the psychological benefits of owning a home of your own – pride of ownership, family building and becoming part of a community have real-life benefits.
Playing it safe turned out not to be in my playbook, so thank you, June, for confirming what I already knew. As my mother always said, paying rent is throwing money away, another wise woman. Go for the stretch, you 30-year-olds; you’ll look back on it as one of life’s pivotal moments. Stay safe, we’re almost there.
