Affordable home requires debt control

By John Perdue - Contributing Columnist

With mortgage interest rates still at all-time lows it stands to reason that rates can only go up from here.

That means this may be the ideal time to consider buying a home. If you’re considering buying a home there are three questions you need to answer first.

What price home can I afford to buy?

The general rule of thumb is that you can afford a home that’s about two to three times your annual income. So if you make $50,000 a year, you may be able to buy a home for $100,000 to $150,000. But that’s just a rough rule of thumb. The last thing you want to do when you buy is to stretch yourself so thin that you can’t afford to do anything outside your home!

Lenders will look at your housing and debt ratios in determining how much they think you can afford. To determine this they will look at your housing ration which is the amount of your monthly income that goes to pay your housing payment. A housing ration of 28 percent or less is considered ideal.

Keep in mind that monthly housing expense doesn’t just include the loan payment. It should also include taxes and insurance, and condo fees if

there are any. You can ask a real estate agent to estimate those costs for you in your price range.

In addition to your housing ration, lenders will also take a look at your total debt ratio. This is where your monthly debt (payments) for things like a car payment and credit cards are considered.

How much will it cost?

There are usually two major expenses when you buy a home: a down payment and closing costs.

First, not all lenders require a down payment. But loans with little to no down payment are considered more risky so they may carry a higher interest rate. Be sure and explore all options with your lender and seek information from your local housing authority or real estate agent before making a decision.

Closing costs usually run about 4 to 5 percent of the home’s sales price. There are times when you and the buyer may agree to split this cost, but be prepared to shoulder all or most of this expense. The good news is this fee does not always have to be paid up front. Your lender may add the cost to your loan and make it part of your monthly payment.

Can I qualify for a loan?

The first thing you need to know is that there are tons of lenders out there so you are not limited to your local bank. If the first lender you talk turns you down, don’t be afraid to approach another lender.

In determining your eligibility for a loan there are several things to consider. Your income, your debts, your credit history, and the value of the property you intend to buy. Be prepared for a detailed look into all these areas.

A word to the wise: homeownership is always more expensive than people realize. When you rent, the landlord is responsible for most of the minor — and all of the major — repairs to your home. When you own a home, it’s up to you to pay for any repairs. Whether it’s a leaky toilet or roof, or a fridge that goes on the blink you’ll have to take care of it yourself. That can get very expensive very quickly.

It’s a good idea to get your debt under control and buy a home that will remain affordable.

By John Perdue

Contributing Columnist

John Perdue is West Virginia’s state treasurer.

John Perdue is West Virginia’s state treasurer.