Buying Your Home - What You Can Afford

How much does my real estate agent need to know?
Real estate agents would say that the more you tell them, the better they can negotiate on your behalf. However, the degree of trust you have with an agent may depend upon their legal obligation. Agents working for buyers have three possible choices: They can represent the buyer exclusively, called single agency, or represent the seller exclusively, called sub- agency, or represent both the buyer and seller in a dual-agency situation. Some states require agents to disclose all possible agency relationships before they enter into a residential real estate transaction. Here is a summary of the three basic types:
* In a traditional relationship, real estate agents and brokers have a fiduciary relationship to the seller. Be aware that the seller pays the commission of both brokers, not just the one who lists and shows the property, but also to the sub- broker, who brings the ready, willing and able buyer to the table.
* Dual agency exists if two agents working for the same broker represent the buyer and seller in a transaction. A potential conflict of interest is created if the listing agent has advance knowledge of another buyer's offer. Therefore, the law states that a dual agent shall not disclose to the buyer that the seller will accept less than the list price, or disclose to the seller that the buyer will pay more than the offer price, without express written permission.
* A buyer also can hire his or her own agent who will represent the buyer's interests exclusively. A buyer's agent in California is usually paid out of the seller's proceeds but the buyer can also elect to hire an agent but be paid out of the buyer's own pocket. In either case following strict fiduciary laws the buyer can trust them with financial information, knowing it will not be transmitted to the other broker and ultimately to the seller.

How much will I spend on maintenance expenses?
Experts generally agree that you can plan on annually spend something each year on maintenance like repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes but, of course, they cost more to purchase. It also depends on how well the house has been maintained over the years.

What is the standard debt-to-income ratio?
A standard ratio used by lenders limits the mortgage payment to about 30 percent of the borrower's gross income and the mortgage payment, combined with all other debts, to 36 percent of the total. These will vary depending upon the lender. The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income. Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Buyers with 20% or more down payments and excellent credit scores/history will be able to obtain the best mortgage rates available at the time saving money over the life of the loan. 

What can I afford?
Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 30 percent of their gross income per month on a mortgage payment or more than 36 percent on debts. It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. However, I advise that buyers settle on a loan officer/lender before they become serious enough to submit an offer on a home or property and obtain a loan preapproval which is stronger when faced with potential competition from other buyers. So, the price you can afford to pay for a home will depend on six factors:
1. gross income
2. the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current mortgage interest rates

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI as these are a legal requirement to pay. This ratio should fall between 30 to 40 percent, although some lenders will go higher under certain circumstances. 

When is the best time to buy?
Here are some frequently cited reasons for buying a house:
* You want to put down stakes in a neighborhood.
* You are not counting on price appreciation in the short term.
* You can afford the monthly payments and have a buffer in reserve for financial emergencies.
* You plan to stay in the house for a reasonable length as the costs of buying and selling a home including real estate commissions, lender fees and closing costs can amount to more than 10 percent of the sales price.
* You prefer to be an owner rather than a renter.
* You can handle the maintenance expenses and responsibilities of homeownership.
* You are not overly concerned by changing home values.

Where do I get information on housing market stats?
A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards but these are very general in nature and not specific to any neighborhood or locale. For overall housing statistics, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builders association probably gets this report. If not, the housing research firm is located in Canton, Mich.; call (800) 755-6269 for information; the firm also maintains an Internet site. Finally, check with the U.S. Bureau of the Census in Washington, D.C.; (301) 763-2422. The census bureau also maintains a site on the Internet. The Chicago Title company also has published a pamphlet, "Who's Buying Homes in America." Write Chicago Title and Trust Family of Title Insurers, 171 North  Clark St., Chicago, IL 60601-3294.

How long do bankruptcies and foreclosures stay on a credit report?

Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider a borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.

How do you determine the value of a troubled property?
Buyers considering a foreclosure or other distressed property should obtain as much information as possible from the lender, including the range of bids expected. It also is important to examine the property. If you are unable to get into a property, carefully review available disclosures, inspection reports and even check with surrounding neighbors about the property's condition. It also is possible to do your own cost comparison through researching comparable properties recorded at local county recorder's and assessor's offices, or through Internet sites specializing in property records. But your best bet will be to rely on your professional real estate agent.