Things to think about before buying
Sara Gilbert/The Coloradoan (Fort Collins, CO)
27 August 2011
Interest rates remain low and house prices are more stable in our region than other parts of the country.
Compared to past years, this might be a very good time to buy a house. But, are you ready? The current recession has reminded us about how important it is to have your finances in order, your job secure, and your budget in good shape before you buy a home.
For many, home ownership offers stability and long term financial security. For others, if you lost your job or couldn't make your payment, owning a home can cause great financial and life stress.
Currently, the rental market in Colorado is tight with a 5.2 percent vacancy rate which means that fewer rentals are available and this also means increasing rental costs in the area.
According to Ryan McMaken of the Colorado Division of Housing: "The larger trend in the state is clearly toward fewer vacancies since 2009. The Denver area and Northern Colorado have some of the tightest markets right now, and not surprisingly, in those areas we're also seeing some of the most sustained growth in rents in recent quarters."
The rising cost of rent and difficulty in finding the right rental property might cause some to consider purchasing a home. Is this the right time for you? Here are some things to consider if you are thinking of becoming a homeowner.
The benefits to home ownership include privacy, a stable home (and school) for children, and the ability to have pets or a garden. Financial benefits are also important and include the possibility of owning the home (with no house payment) in 30 years or so and tax benefits because the interest you pay monthly in your payment is usually tax deductible. Hopefully, too, the home will increase in value though that has not been as evident during the past five years or so during the foreclosure crisis.
Being a tenant does have benefits also, and these should be considered before moving from renter to owner. As a tenant, if something breaks, the landlord is the one who pays to have repairs made. If you lose your job or get transferred, it is easier and less costly to get out of a lease so being a tenant allows you to be more mobile. Apartment dwellers often have amenities such as pools or work-out rooms and may not have the lawn upkeep responsibilities of a homeowner.
Looking at the pros and cons of renting and homeownership is important. If you do decide that your life is stable enough to become a homeowner, the next steps involve considering affordability of the home purchase.
Most lenders are requiring higher down payments, sometimes as much as 20 percent.
There are still low down payment options through FHA or VA loans. Most lenders will require documentation showing savings in the bank and a good monthly income stream.
A good rule of thumb is that your house payments not exceed 31 percent of your gross income. In addition all debt including the house, cars or other debt payments shouldn't exceed 41 percent of your gross income. There are many websites that can help you analyze your ability to afford house payments including GreenPath University at www.greenpath.com.
A good credit history is essential and lenders will require this. Pull your credit report for free at www.annualcreditreport.com and review your history for accuracy. Additionally, you must consider your own budget to know what you can afford for a house payment. If you have high day-care costs or other such living expenses, you must make sure that these still fit within your budget if you buy a home.
It is a good idea to meet with more than one lender and find out how to become pre-qualified before your house search even begins. Pre-qualification involves the lender reviewing all of your finances before you start the house hunt and is wise because you will know what you can afford before you start looking at houses. If you decide to buy, make sure you know all that you can about the process. GreenPath and Neighbor to Neighbor, both local nonprofits, can help you understand your homeownership choices.
Sara Gilbert is the Colorado group manager for the local GreenPath (formerly Consumer Credit Counseling Service), 1247 Riverside Ave., Fort Collins. Call her at (970) 229-0695 or send email to sgilbert@greenpath.com.