Published 2 June 2019
June is National Homeownership Month. According to the National Association of Realtors, homeownership month is “a time to celebrate and promote the American Dream of owning a home.” NAR goes on to say that owning a home is not only the best investment an individual can make to build their personal wealth, it also provides social stability, builds communities and is a driving force for the national economy.
Homeownership is easier to achieve than most people think. The key to a successful purchase is to live your life as though you already own a home. With a little bit of knowledge, a modicum of discipline and a good team in your corner, the transition from renter to homeowner can be simple, satisfying and financially rewarding. What follows are some rule-of-thumb guidelines prospective homebuyers should know.
A little bit of knowledge. Knowing what’s expected of a homeowner is the first order of business. For example, how much cash does a first-time buyer need to save for a down payment and closing costs? According to Teri Baca, homeownership representative for the New Mexico Mortgage Finance Authority, “many buyers who have never owned a home or who own a home they haven’t lived in for the past three-years can purchase using as little as $500 of their own funds”.
What about credit? “Credit doesn’t have to be perfect,” Baca said. “A credit score of 620 is all that’s needed to meet MFA’s minimum credit requirement”.
How about income? Many factors determine how much income buyers need to purchase a home, but there are some basic guidelines buyers can use to determine if they qualify. One such consideration is how much of a buyer’s gross monthly income can be safely spent on a house payment without overburdening the buyer’s finances. The ballpark answer is around 29 percent. Using that percentage, a buyer earning Doña Ana County’s median income of $39,113, or just over $3,250 per month before taxes, could qualify for a house payment of around $943. Since most first-time buyers pay roughly $8 per month for each $1,000 of the purchase price of the home they buy, the $943 monthly payment translates to a sales price of roughly $134,714.
Another income rule-of-thumb is how much of a buyer’s gross income can be spent on their house payment and all their other monthly payments combined. The answer is around 41 percent, or $1,333 in our scenario. After subtracting the monthly house payment of $943 from that figure, our buyer could spend up to roughly $390 per month on car notes, credit card payments and the like, and still qualify to purchase a $134,714 home.
A modicum of discipline. This is the one area of preparation for homeownership that buyers find most challenging.
Saving for the down payment, reducing debt and improving credit all take focus and commitment. But buyers don’t have to go it alone. Financial websites, such as www.CreditKarma.com and www.MyFico.com, provide easy step-by-step tips on how to effectively create a budget and improve credit scores.
For buyers who desire a more structured approach to preparing for homeownership, nonprofit agencies, such as the National Foundation for Credit Counseling (www.nfcc.org / 800-388-2227) and Southwest Regional Housing and Development Corporation in Las Cruces (www.swnm.org / 575-546-4181), provide low or no-cost credit and homeownership preparation counseling to prospective homebuyers.
A good team in your corner. Most people are surprised to learn that there are in the neighborhood of 28 people involved in each home sale transaction. The list includes loan officers, processors and underwriters; title company officers and searchers, appraisers and real estate agents; buyers and sellers, home inspectors, insurance agents and home warranty providers; government agencies, and more. So, who captains the somewhat disconnected team of people who provide these important services? The answer is your real estate agent.
Choosing an agent is one of the most critical decisions a homebuyer will have to make. Is the agent experienced and knowledgeable about the loan process and know which lenders offer financing at the lowest possible cost? Is he or she a good negotiator, familiar with the marketplace and willing to put your interests ahead of theirs? You won’t know until you’ve “interviewed” at least four-to-six of them. “Interviews” can be discretely conducted by simply calling on a few listings, visiting open houses, and asking friends and relatives for referrals to agents they know or have worked with in the past. After a few conversations, you’ll be well equipped to choose the person who will captain your team and guide you through the process.
It’s important to note that qualifying guidelines used in our buyer scenario are not set in stone. Some buyers, such as those who have excellent credit and money left over after the purchase, may be allowed to exceed the guidelines. On the other hand, buyers who are a bit less qualified may be held to stricter set of rules. In the end, gathering as much information as possible before making a purchase will empower you to make informed financial decisions throughout the process, and will result in a trouble-free and satisfying transition.
See you at closing.
Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com