Owning a home is one of the biggest dreams for most persons. They envision the time when they can get rid of their landlords, make their own home décor choices, and stop worrying about home security. However, owning a home can become more like a nightmare if you bite off more home than you can chew. It's important to match your home ownership plans with what you can truly afford.
The mortgage meltdown in the United States has had far-reaching implications on the global financial marketplace. While Americans face thousands of devastating foreclosures and some stunning bank crashes, the rest of the world is reeling from the effects of the reduction in credit availability and the fall in the American consumers’ spending power.
One of the reasons for the current real estate crisis up north is that many people spent too much money buying homes that they really didn't have the earning capacity to pay for. In previous years, the American economy had enjoyed a booming real estate market, with an exponential growth in home prices. In expectation of this continued growth, many persons bought homes with mortgage payments that they couldn't afford, hoping to upgrade the property and ‘flip’ it for quick profit. The softening of real estate prices meant that they were stuck with homes they couldn't sell.
Other persons who didn't qualify for mortgages were swayed into buying homes by lenient lending policies that offered ‘zero per cent down’ deals, and sub-prime mortgage plans. These loans came with a catch that at some point the initially reasonable interest rate would balloon into an amount that was beyond the means of the homeowner to pay. To compound the crisis, large financial institutions invested in these sub-prime loans which now seem irrecoverable.
It's not impossible for this scenario to be repeated in Jamaica if we don't learn the lessons from their costly mistakes. When thinking of home ownership there are some key issues that you need to consider:
Do you have enough money for the down payment?
Most sales agreements require between 15 - 20 per cent of the purchase amount as an initial deposit. If you're tempted by an offer that has a significantly lower down payment, remember that it will only increase your loan amount and your monthly requirement. Money to pay closing costs such as attorney's fees, processing fees and government taxes must also be available. Note that you should never totally deplete your savings for the deposit, as this can put you at risk in case of an emergency.
Can you pay the mortgage along with your other debts?
This is the lender's most important consideration when deciding to grant you a loan. Your debt-to-income ratio looks at your mortgage payments and other loan obligations, such as credit cards and car loans, as a percentage of your gross income. Many mortgage companies use a ratio of approximately 33 per cent; that is your total loan payments should not be more than one third of your gross income.
Can you afford to maintain the property?
It's one thing to have the down payment and the mortgage covered. Being able to afford the regular upkeep costs associated with home ownership is another. You also have to consider home insurance and mortgage peril insurance payments, property taxes, strata fees, security and repair costs in determining if you can afford to buy a house.
Is your source of income stable?
You need to think about how secure your income sources are before you commit to this big purchase. Some persons have taken the risky route to home ownership by depending on income from ‘alternative’ investments to meet their house payments. If you would never be able to afford the loan on your regular salary, maybe you should re-think buying a house until you can create additional earnings that you can rely on.
Is it a lot cheaper to rent than to buy?
If the cost of purchasing the kind of home you would like to live in is several times the cost to rent a similar property, it might not be a wise financial decision to buy. If there is a huge difference in renting vs. buying costs, then perhaps you can consider getting a less expensive house. You can even rent out your property and save the extra amount, so that later you will be able to afford to trade up to your dream house.
If you're comfortable with your answers to the above, and you believe you're ready to take the plunge into buying your own home, how about testing the water before you actually jump in? Calculate the total expected cost of home ownership and save this amount for a few months to see if you can really manage it. If you find that your ‘pretend’ mortgage payment does not break your pocket, then go for it- you just might be able to afford your own home.
© Cherryl Hanson Simpson
Cherryl is a financial columnist, consultant and coach. See more of her work at http://www.financiallyfreenetwork.com and http://www.financiallysmartonline.com Contact Cherryl.