GOLDEN VALLEY, Minn. -- The flip side of the depressed state of the housing market is that new buyers or those upgrading may find great bargains.
Given that buying a home is one of the largest financial decision most families will make in their lifetime, it is important that you give plenty of thought before making a change.
Dan Ament, Financial Advisor with Morgan Stanley Smith Barney in Wayzata, joined us on KARE 11 Sunrise with some financial perspective when buying a home.
Housing market pain creates opportunity:
The economy has been muddling along for years. Joblessness persists. Income growth is meager. It should be no surprise that home ownership in the U.S. has fallen to its lowest level since 1998 - 65.9% as of mid 2011. Falling along with home ownership has been home prices. The flip side of this environment is the opportunity it has created for buyers. Home affordability (payment as a % of income) is at its lowest levels in a many years according to the U.S. Census Bureau report in July 2011.
Debt ratios (qualifying for a loan):
Front-end ratios: The front-end ratio signifies the payment a buyer can reasonably afford, from a lender's point of view. You may prefer a lower payment. The front-end ratio for a FHA loan is 31%. For a conforming conventional loan, the front-end ratio is 33%. This means if your monthly gross income is $4,000, to qualify for the maximum FHA loan, your monthly principal, interest, taxes and insurance (PITI) payment can not exceed $1,240. For a conventional loan, it is $1,320.
Back-end Ratios: The back-end ratio reflects your new mortgage payment, plus all recurring debt. It too, is computed on your gross monthly income. The back-end is higher than the front-end. For an FHA loan, the back-end ratio is 43%. For a conforming conventional loan, it is 45%.
Down payments:
Down payment amounts will depend on several factors. First, how much do you feel comfortable putting down? It may be advisable that first-time home buyers keep a healthy reserve and not dump every single cent into a home.
FHA Down Payments - Minimum FHA (Federal Housing Administration) down payments are presently 3.5% of the sales price. To borrow $150,000, your sales price will be $155,440, and your down payment is 5,440.
Conventional programs - There are conventional loan programs that allow up to 97% financing including
mortgage insurance.
"Test drive" your expected mortgage payment:
Before you jump into home ownership, why not set aside the additional amount you would pay for a mortgage every month to see how you do? For example, if your rent is $800, and you plan to pay $1,200 for a PITI payment, set aside $400 per month for a few months. Also, consider the impact of additional expenses related to insurance, taxes and utilities.
Sources and excerpts:
CNN Money - How much house can you afford?
SmartMoney - How much house and home mortgage can I afford - calculator
About.com
Livesolid.com - Buying the right size house for your family
Dan Ament is a Financial Advisor with The Ament Group at Morgan Stanley Smith Barney located in Wayzata, MN and may be reached at 952-475-4302 or dan.a.ament@mssb.com .
For more information and capital market research click: http://fa.smithbarney.com/amentgroup/
Morgan Stanley Smith Barney LLC. Member SIPC.
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Smith Barney or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.