That means, on average, the typical American household must be willing to pay more than 5.5 times its total annual income to buy a new home. Spending that kind of money is daunting, to say the least.
Last month, fellow Fool Anand Chokkavelu pointed to the largely unknown fact that U.S. homeowners have, in general, a much higher net worth than people who rent. Certainly there are numerous factors that contribute to this state of affairs, but the reality is pretty clear: Homeownership tends to result in greater financial success for U.S. households.
So we know that buying a home, in general, makes sense financially. We also know that it's a huge investment and can be very intimidating, particularly for first-time buyers. So how do we overcome this intimidation?
By getting help from the experts.
Recently I spoke with Bennie Waller, department chair of finance and real estate at Longwood University. Waller is a longtime real estate investor, and in addition to his academic work in the field, he holds a real estate license and is active in the market. He knows the theory, and he can put into practice.
I asked Waller for his advice to first-time or prospective homeowners. Here is what he had to say:
1. You should not consider buying a home until you are reasonably secure in your job and reasonably certain that you will not be moving in the next several years. If you anticipate being transient over the next several years, renting might be best for you. If you decide to rent, purchase rental insurance in case of casualty such as fire. Landlords are generally not responsible for the loss of personal items.
2. Do your homework. Research the area in terms of crime, changes in property values, and anticipated changes (e.g., the impact of construction of new roads or commercial buildings for retail or office space). If you have children or are planning to have children, be sure to investigate the schools in the area.
3. If you are a young and upwardly mobile professional, you may want to consider a condo or townhome. These types of properties many times have no yards, and the maintenance of the outside of the property is generally managed by a homeowner's association. However, you must pay for these services in the form of monthly homeowner's dues, which can be quite expensive, so be sure to ask about these fees.
4. Get your finances in order. A conventional loan will require a 20% down payment. This is generally the single most prohibitive factor of homeownership. However, there are options for first-time homebuyers that require less than the 20%. There is an option of providing less than 20% as the down payment and then purchasing private mortgage insurance, or PMI, which guarantees the difference in your down payment and the required 20%. PMI insurance is not cheap, so factor this into your decision.
5. Get your credit reports and your credit scores (see AnnualCreditReport.com). Shop around for the best mortgage rates. Before getting too attached to the thought of homeownership, get pre-approved so you have an idea of what you can afford. Don't overextend yourself financially.
6. Be realistic as to your expectations. Based on an individual with a $36,000 annual salary and no other debts (car payments, credit cards, or student loans), and with excellent credit (FICO score better than 750), you would likely qualify for a mortgage loan for about $126,311. This is based on an annual fixed interest rate of 4.5%, monthly property taxes of $100, and monthly property insurance of $100. Based on these assumptions, you could afford a home that costs about $158,000 but would require a down payment of about $32,000.
Continuing the example, with the addition of a combined $500-per-month car and student-loan payment, the amount you will qualify for changes drastically. In fact, you can now only afford a home of less than $94,000.
7. Other expenses you may overlook. Other factors to consider about homeownership are maintenance and utilities (and possibly association dues). Replacing a heat pump, for example, can be very expensive.
8. Seek out the advice of a reputable real estate professional.
Buying a house costs a lot of money. It involves getting a mortgage. It's a multi-step process that involves lawyers, appraisers, real estate agents, bankers, inspectors, and potentially more. Going through the process the first time can be very scary.
But by reading this article you're already on the right track. Seek out the advice of others in your community. Ask for help. Listen and learn. Hire a professional to guide and advise you.
Buying a house can be intimidating, but with a little work and a little help it can be done. And as Anand pointed out last month, it could be a first step toward financial success.
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