"Should we continue renting or go ahead and buy?" Hundreds of thousands of Americans ask themselves that every year.
There's no easy answer. Emotions, family and personal reasons all come into play in any home-buying decision.
No one knows what the future holds for you, your family, your job or your finances. But we can help you understand what you're going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.
When you get that urge to buy a house, the first thing to do is step back and ask whether it makes more sense to keep renting for a while. If you still want to buy, you need to figure out how much house you can afford.
If you're looking for the best return on your money, historically you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds. While the stock market's long-term average rate of return is in the range of 8 percent to 10 percent, housing historically has appreciated on average in the low- to mid-single digits. Don't buy solely for investment gain.
On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.
Owners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also don't have to worry about their housing costs shooting through the roof because lenders can't boost borrowers' rates and payments, unless those borrowers have adjustable-rate mortgages.
When something breaks at an apartment, it's the landlord's problem. When it's your name on the deed, the problem is yours. If you throw every penny into a down payment, you're taking a big risk because you may not have enough money left to fix leaky pipes or buy a new air conditioner.
Potential buyers might want to hold off for other reasons. If there's a good chance that you will be laid off soon, you might want to wait. The same goes for people who plan to leave a job soon. The monthly payment isn't the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.
Some middle-ground approaches to homeownership blend elements of buying and renting. Some of the more popular loan types are seller financing, "lease with an option to buy" and "contract for a deed" plans.
In seller financing, the buyer buys a $150,000 home by taking out an $80,000 bank loan, putting $10,000 down and getting the seller to "carry back" a $20,000 second mortgage. The buyer makes payments on the first loan to the bank and the second loan to the seller. That second mortgage from the seller usually comes with a higher rate, a shorter term and a potential balloon payment. Or, the seller can hold the entire mortgage and the buyer makes payments directly to the seller.
Pro: It reduces the cash needed to get into a home and could reduce closing costs.
Con: There are two monthly mortgages payments and the seller determines the interest rate for the second loan.
Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you'll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called "debt-to-income ratios."
The standard debt-to-income ratios are:
- The housing expense, or front-end ratio, shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense.
- The total debt-to-income, or back-end ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.
Take a home buyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income would be $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)
Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.)
Here's a look at typical debt ratio requirements by loan type:
- Conventional loans:
Housing costs: 26 to 28 percent of monthly gross income.
Housing plus debt costs: 33-36 percent of monthly gross income.
- FHA loans
Housing costs: 29 percent of monthly gross income.
Housing plus debt costs: 41 percent of monthly gross income.
In addition, lenders include the cost of taxes and insurance when calculating how much house you can afford:
- Real estate taxes: Because property taxes are part of your monthly mortgage payment, it is important to get an estimate of what yours would be. Ask your real estate agent or tax office for the rates that apply in the area you want to buy.
- Homeowners insurance: You must insure your property to obtain a mortgage. You can get an estimate of insurance costs from an insurance agent or insurance company. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods, earthquakes, or wind in coastal areas. If you put down less than 20 percent of your home's value, you also will have to obtain mortgage insurance or take out a second loan, called a piggyback loan, to bring the first mortgage down to 80 percent of the purchase price. Both alternatives will raise your monthly payment.
Click here to learn more about mortgage rates in your state: Mortgage Rates
HUD Online Glossary (Source: http://www.hud.gov - July 2006)
HUD Common Questions (Source: http://www.hud.gov - July 2006)
How can I buy a HUD Home?
How do members of the housing industry access the full knowledge base?
How can FHA help me buy a home?
What are the basic eligibility requirements for FHA financing?
What impact does the recent IRS ruling have on certain down payment assistance providers?
What is the American Dream Down Payment Initiative?
How can a homebuyer get down payment or closing cost assistance?
How can FHA assist me in lowering my energy costs?
Where can I obtain a list of HUD Homes for sale?
Can an individual purchase a HUD Home for a dollar?
When can I stop paying my monthly FHA mortgage insurance premium?
How do I find non-profits who operate down payment programs?
How does HUD define a first time homebuyer?
What is the Streamlined k program?
Does HUD/FHA have grant programs available for home repair?
How can I finance the purchase of a HUD Home?
Am I eligible for a mortgage insurance refund?
How do lenders document gifts given in the form of cash?
How do I become a mortgage insurance refund tracer?
How can a police officer obtain a HUD Home at a discount?
Where can I obtain FHA forms and publications?
What FHA programs are available to purchase a manufactured or mobile home?
What is the primary FHA mortgage insurance program?
How much can a lender charge on an FHA loan?
(En Espanol) Where can I obtain a list of HUD Homes for sale?
Can I use an FHA mortgage to purchase a condominium?
Is a borrower eligible for FHA financing if they have participated in consumer credit counseling?
Can gift funds come from the seller, lender or other interested party?
Can I make major improvements to my home without getting prior approval from FHA?
What is the FHA mortgage limit in my area?
Are there age requirements for borrowers using FHA financing?
If I am listed in the Credit Alert or CAIVRS system, what does that mean?
Can I rent a HUD home?
What is the Low/Moderate Income Families Program?
Are there FHA programs available for single parents?
Do the loan limits include the Upfront MIP?
Where can I obtain copies of FHA policy documents?
What can I do if my manufactured home has defects that need to be repaired?
Can I do a FHA refinance if I own the property, but am not named on the existing loan?
How do I obtain information about the payoff or servicing of a HUD Nehemiah Housing Opportunity Grant?
What is the primary FHA program for home repair?
Where can I find FHA's policy on gift funds?
Can investors assume FHA loans?
How can a teacher obtain a HUD Home at a discount?
Is there a quick and inexpensive option to refinance my FHA mortgage?
Can I receive a loan from a family member instead of a gift?
What foreclosure prevention options are available on non-FHA insured mortgages?
How can a firefighter or EMT purchase a HUD Home at a discount?
How do I find an FHA approved lender?
Can borrowers who do their own repairs under Section 203(k) receive cash reimbursement for their labor?
Can I use FHA financing to acquire a second home?
Is it acceptable to get a loan for the downpayment?
What is the Section 235 Assistance program?
What are the penalties for a HUD Home owner-occupant purchaser that does not occupy the property?
How do I use a bridal registry account for my downpayment?
Who is eligible for a HECM loan?
When should case numbers be canceled?
What rate do borrowers qualify at when using an ARM loan?
When can I stop paying my monthly private mortgage insurance?
What is the Housing Voucher homeownership program?
Can I use the Streamline K program to purchase a HUD home?
Is there a special HUD program that allows hurricane evacuees to purchase HUD homes?
What is a HUD revitalization area?
Does FHA allow unsecured loans to be used toward the downpayment?
What FHA program allows me to lower my initial monthly mortgage payments?
What FHA program allows for a reduction of interest rates?
Can I "rent to own" a HUD home?
What property improvement programs are available through FHA?
How do lenders document cash assets?
How can FHA help me if I am behind in my mortgage payments?
Can FHA clear the CAIVRS if I have evidence supporting the debt is paid off?
Must premium pricing be disclosed to the buyer?
What are the requirements for a teacher to purchase under the Teacher Next Door Program?
What is the Good Faith Estimate?
What is the primary FHA rehabilitation mortgage insurance program?
How does HUD determine the sales price of a HUD Home?
Why is a HUD Home not listed for sale?
Does FHA have special programs for Veterans?
Does FHA allow investor participation in the 203(k) or Streamline K programs?
Where can I obtain a list of government properties for sale?
Where can I find free housing counseling services?
What if I am behind in my mortgage payments and my lender won't talk to me?
Are there restrictions on when I can pre-pay or payoff my FHA mortgage?
(En Espanol) What are the basic eligibility requirements for FHA financing?
Where can I find information about a lenders' responsibility under RESPA?
What does FHA offer to military veterans?
Do I have to pay a fee to collect my mortgage insurance refund?
Can I get my HUD Home earnest money back when my loan is denied?
How do I figure how much money the lender is allowed to require in my escrow account?
Can I still obtain a FHA reverse mortgage if I lost a home through divorce?
Who gets the MIP refund if a home is sold by assumption?
How do I make my rental property available for Section 8 tenants?
Are lenders restricted from originating FHA loans for their employees?
How does HUD determine the winning bidder on HUD Home sales?
(En Espanol) How can FHA help me buy a home?
Can an investor bid on a HUD Home?
How can I obtain a copy of the appraisal on a HUD Home?
How much is counted for the borrower's labor when calculating sweat equity?
Do FHA mortgage limits automatically increase after Freddie Mac's annual mortgage limit adjustment?
What FHA program allows me to pay my mortgage off early?
Will FHA allow a Streamline Refinance of a loan by an investor?
Will HUD contribute to seller-funded down payment assistance programs on the purchase of a HUD Home?
As a senior citizen how can I convert the equity in my home into income?
What is a self-help agreement?
Can lenders collect a fee for originating a streamline refinance that gets transferred to another lender prior to closing?
How do I place a bid on a HUD Home?
What is the FHA Urban Renewal Program?
How do I lodge a complaint about the condition of a new home?
Can a lender process a 203(k) rehabilitation mortgage for an investor?
What are the counseling requirements on an FHA reverse mortgage?
For an existing property, what are the minimum distances allowed by FHA between a well and a septic tank?
Must FHA be notified when an FHA reverse mortgage borrower dies?
How do I lodge a complaint about the condition of an existing home?
How can I file a complaint about a settlement or closing issue?
How can I obtain a rental assistance voucher that can be used anywhere?
Where can I obtain information on prepayment penalties for FHA mortgages?
How does a real estate agent register to sell HUD Homes?
How do I document the value of personal property sold for funds to close?
Can a Section 203(k) loan be refinanced to a different loan type?
How do I obtain more information about Regulation Z?
What is the status of a particular HUD Home?
How do I obtain from HUD copies of documents related to my FHA insured loan?
How do I obtain a payoff or subordination of a second lien held by HUD?
How can I have the utilities turned on in a HUD Home prior to closing?
What is mortgage insurance for disaster victims (Section 203h)?
How can I find a list of non-profit agencies that are approved to do business with FHA?
Where can I find information about HUD's multifamily (5 or more housing units) housing programs?
(En Espanol) How can I buy a HUD home?
Are there exceptions to the loss of an earnest money deposit on a HUD Home?
When can interest rate adjustments be made on FHA adjustable rate mortgages?
Where can I find policy governing rent credit?
When is a HUD Homes sales contract ratified?
Who do I contact for support on Title I servicing issues?
How do I know if I won the bid on a HUD Home?
Is a hurricane evacuee who is presently renting a HUD home eligible to buy the home?
How do I file a complaint against a lender who is not FHA approved?
How can I get information about Rural Development programs?
How can I apply for a public housing unit?
How are bids on HUD Homes processed?
How do I report fraud related to a HUD/FHA transaction?
Can an investor participate in FHA's 203(k) Rehabilitation Program?
Where can I find general information about assistance for victims of hurricanes?
How can I find a real estate agent approved to sell HUD Homes?
How does the lender disburse the remaining 203(k) escrow?
Where can I find a list of HUD-approved non-profits?
Are there programs for experimental housing?
What programs are available for outlying areas?
How can a non-profit organization purchase a HUD Home at a discount?
What is the FHA Urban Renewal Rehabilitation Program?
What programs are available for Native Americans on tribal land?
Can the lender collect from the borrower amounts the lender advanced to HUD for a required principal reduction?
Where can I find information about renting or building apartments and other multifamily housing?
How do I request copies of documents from HUD?
What are my rights when obtaining an adjustable rate mortgage?
Are there special programs for home purchases near military bases?
What are Fair Market Rents?
How can my non-profit organization work with FHA programs?
Can a Section 235 loan be refinanced?
Can lenders process loans for HUD employees?
What disaster relief is available for public housing tenants?
How can I find a property that provides below market rents?
What is the mortgage insurance for service members program?
How do I pay rent on a HUD Home?
How does a real estate agent obtain a Name Address Identifier Number (NAID)?
Can a tenant occupy an FHA property through the conveyance process to HUD?
How do I submit my annual certification for my Next Door property?
What disaster relief is available for homes with FHA insurance?
What FHA program allows for purchases on Indian Reservations?
What if I have a problem with the servicing of my escrow account?
How can I get information on HUD's homeless programs?
How do I cancel a HUD Homes sales contract?
How do I request a payoff or subordination of my Next Door lien?
What contracting opportunities are available for HUD Homes?
How do I document assets that were acquired from the sale of a home?
What programs are available in older, declining areas?
How can I extend a HUD Homes sales contract?
Can I subordinate HUD's lien on a Next Door property?
Are funds saved through savings clubs eligible?
How do I deal with a servicing issue in which the loan is not FHA insured?
What disaster relief is available for homes not FHA insured?
How can I obtain mortgage account information from my lender?
What can I do if my servicing lender is handling my escrow account properly?
What rights do I have as a renter or tenant?
Who do I contact if a HUD Home was not properly winterized?
HUD or FHA is garnishing my tax return, how can I get more information?
How do I lodge a complaint about the company selling HUD Homes?
How can I get more information on consumer protection?
What is the status of my occupied conveyance request?
How can I file a housing discrimination complaint?
How do I obtain FHA or HUD information in Spanish?
How do I file a complaint against a national bank?
How do I file a complaint against a local housing program or provider?
(En Espanol) Am I eligible for a mortgage insurance refund?
How do I collect on a bill or lien attached to a HUD Home?
Where can I get assistance if my identify has been stolen?
How can I lodge a complaint involving a Veterans Administration loan?
Who do I contact to pay off my property improvement loan?
How do I file a complaint against a Federal Savings and Loan?
How do I file a complaint against a credit union?
How do I file a complaint against my public housing agency or landlord who receives rent subsidy from HUD?