I know that I have drilled in the “no debt” mantra throughout this book, but I also realize that some of my clients will want to purchase a home again. My only request is that you wait until several things are in place.
First, please make sure that you have adequate savings, including your $1,000 Emergency Fund and at least four to six months of all of your household expenses. I want to make sure your new dream home doesn’t mean the return of an old nightmare.
Secondly, make sure you have a substantial down payment so that you can avoid paying Private Mortgage Insurance (“PMI”). PMI is an additional insurance payment when your down payment is too small. Lenders know that borrowers with a small down payment have a much higher risk of defaulting.
Third, make sure you can afford the payments. Do the math. Don’t let it be an emotional decision. Be brutally honest with yourself regarding your immediate and future earnings, expenses, and other financial details.
To help you stay within healthy parameters of purchasing a new home, make sure each of the following is in place:
- Have a down payment of at least 20 percent without dipping into your Emergency Fund or your 3-6 month savings.
- Do not borrow money for a down payment. Not from friends. Not from family. A gift is fine, as long as there are no strings attached.
Get a loan at a fixed rate for no more than 15 years. - Your new payment should be less than 25 percent of your take-home pay. Be sure to account for not-so-obvious expenses including homeowner’s insurance, property taxes, city taxes, water and sewer fees, HOA dues, and Mello Roos taxes.
If you can satisfy these parameters, you should still consider your lender carefully. Don’t waste time on a lender who will hold FICO above all other factors.
Instead, find a lender that does individual underwriting – a lender that looks that everything, including your income, assets, recent payment history, and character. One such lender is Churchill Mortgage, which is endorsed by Dave Ramsey. Also consider looking for a lender that will use alternative credit reporting services like eCredable (www.ecredable.com/marketplace).
If it turns out that you’re not quite ready to purchase a home, consider a rent-to-own arrangement or just renting.
RENTING VS. BUYING
We have been told over and over, for many decades, that part of fulfilling the American dream is to own your own home. Let’s take a closer look at that.
Owning your own home means you own all the repairs, all the maintenance, all the utilities and expenses, all the upkeep and lawn maintenance, all the major appliance costs and repairs, and the cost of furnishing and general upkeep. Don’t forget property taxes, homeowners insurance, HOA dues, Mello Roos taxes, and other financial obligations.
For some people, home ownership might be a major life goal. But, does it make sense in your current financial situation and in the long run? Sometimes renting makes more sense, especially if you can reduce your monthly overhead costs and find a rental that fulfills all your needs for less than a monthly mortgage payment.
Home ownership can be wonderful, but it can also ruin you financially if you are not prepared for it. When you’re being really honest with yourself, maybe this is something you should pass on for now. Only you can figure that out. I just encourage you to consider all your options and the pros and cons of each.
If you do end up renting, be sure that your rent does not exceed 25% of your take-home pay. Don’t tempt your fate by looking at places that exceed what you can afford. This is another great time to practice saying, “No.”
For more information contact your Modesto bankruptcy attorney.