Is it Time to Trade up? Kiss rent good-bye and start racking up some serious net worth
Your rent is by far your single biggest expense. But every time you hand over your hard-earned cash to your landlord, you’re robbing yourself of a huge opportunity to build up major assets. What’s the alternative? Buying your own place.
Maybe you think you couldn’t qualify for house without traditional pay stubs. Besides, who wants to deal with all that maintenance — a yard, a pool, a roof — when you’d rather be shopping or gossiping with the girls over lunch? But there’s a way to enjoy both the laidback lifestyle of apartment living and the paybacks of ownership. Make the right choices and you can have it all — a money lifestyle and the chance to have your housing payment work for you for a change.
Buying a Lifestyle
For a busy first-time homebuyer, going with an attached home — a condominium, townhouse, condo conversion or high-rise — is often a great segue from apartment life to homeownership. A condo converted from an apartment will cost $300 to $600 a month more than renting, depending on a community’s fees and your mortgage’s length and interest rate, says Matthew Krac, a principal in Florida-based condo-converter SunVest Communities. That might sound like a costly premium, but a single-family home will set you back even more and carry a host of additional expenses, including a lawn service and occasional exterior repairs.
Plus, most modern condominium and high-rise communities have features that would set you back half a million bucks or more in a house. SunVest’s properties, which the company is building in Las Vegas, Phoenix, Orlando and Tampa Bay, include clubhouses with party rooms, home theaters, fitness centers and indoor basketball and racquetball courts — all for prices beginning well below $300,000. Buy a condo in a neighborhood of single-family homes costing at $500,000 or more, and you’ll be near high-end restaurants and malls at a fraction of the price it would cost you to buy a house.
High-rise communities are costlier than condo conversions — usually at least $400,000 to start. But they’re often tricked out with features such as small cafes and delis, as well as concierges that arrange for pickup of dry-cleaning and groceries.
That footloose living comes with a premium: Condo neighborhoods collect homeowners’ association fees starting at a minimum of $100 a month. When you’re qualifying for a mortgage, your lender will include that regular charge when she’s determining how much place you can afford. To better understand how the dues will affect the mortgage your bank will allow, subtract the association charge from the monthly loan payment. If you’re pre-approved for $1,000 a month, your mortgage payment and association fee combined can’t exceed that amount.
If those association assessments sound steep, remember that they cover landscaping services, pool cleaning, trash collection, outside maintenance such as the roof and the paint job, and in some cases even your water bill. That’ll mean less time taking care of your home and more time making bank and having fun.
Becoming a Loan Star
Don’t fret if your income is mostly cash: Scores of entertainers buy homes every year without pay stubs or W-2 forms from employers.
Michael Behrens, president of Mortgage Funding USA in Cincinnati, Ohio, says banks will loan based on cash flow rather than proof of income. Behrens, who counts dancers among his clients, tells aspiring homebuyers to assemble one to two years of bank statements showing a constant income stream pouring into their coffers. He also advises retaining an accountant for about $300 at tax season to file a Schedule C form, which lets you report a small amount of your income as business revenue. That’ll verify that you’re self-employed.
“You want to give the lender confidence that you have a steady income,” Behrens says. “As long as lenders can see someone has had $6,000 or $8,000 a month coming into their bank account for 24 months, we’re going to make them a loan.”
But cash flow alone won’t land you that mortgage. Your credit score is key to determining how much banks will let you borrow — or whether they’ll let you borrow at all. Credit scores range from 300 to 850; the higher your number, the lower your interest rate and the bigger your loan.
John Hodges, director of client relations at Choice Finance in Rockville, Md., says credit scores of 660 and above will qualify you for “A-paper loans” that let you finance 100 percent of the house’s price at standard interest rates, which were about 6.5 percent in early August. Drop below 660, and you’re looking at interest rates of as much as 8 percent. Plus, your bank might loan you just 80 percent of your home’s value, leaving you with a 20 percent down payment.
“A lower credit score puts you in a situation where you’re not dictating to the lender what you’ll choose — the lender is telling you what he will give you,” says Hodges, who assists cash-only workers including bartenders.
Lenders advise homebuyers to scope out their credit rating and report before they try to qualify for a loan. Nab a free copy of your credit history at www.annualcreditreport.com, but that site won’t tabulate your credit score. For your digits, stop by www.myfico.com, where you can track your credit score for $7.95 a month.
It’s essential to comb over your credit report for mistakes or inaccuracies. Hodges says lenders will contact creditors for you to correct bad information, and they’ll also obtain a new score based on the repaired report.
Don’t despair if your credit score is subpar. Take a few months or a year to spend down your credit-card balances and keep them below 50 percent of your max-out amount. If possible, pay your cards off at the end of every month. Make payments on all your bills, including your car loan and utilities, on time.
“All those habits can greatly impact your credit score in a positive way,” Hodges says. “Literally every month you’re doing those things, your credit score will go up.”
Behrens urges his clients to pay off accounts that have gone into collection, including credit-card debts that banks have written off as unpaid. He also uses a credit-repair firm to help eliminate errors from your credit report. Lexington Law will charge a $99 setup fee, plus an additional $39 a month that clients can cancel as soon as they’ve seen sufficient improvement in their scores.
A potential lender will also weigh your debt-to-income ratio, which tallies up all your obligations — car loans, credit cards and student loans — and matches them against your gross income. If your monthly debt payments total more than 45 percent of your income, you’ll need to pay down some debt before you go loan-shopping.
Finally, your mortgage bank will expect to see some emergency cash stowed away in a savings account. Hodges says lenders want to know you could cover your mortgage if you have a couple of low-earning months. Try to set aside at least two months, and preferably six months, of the mortgage payment you’re looking at. If you’re shooting for a monthly mortgage bill of $2,000, that means putting $4,000 to $12,000 in the bank.
Behrens counsels his clients to keep their monthly payment at 30 percent or less of their income. Avoid the 40 percent loan-to-income ratios some banks allow on less conventional mortgages. Anything beyond 30 percent will make you house-rich and cash-poor. If you’re bringing home $5,000 a month, for example, aim for between $900 and $1,200 in monthly payments.
“You want to be able to make your payment and live, instead of living to make your payment,” Behrens says.
Closing the Deal
Investors and homeowners alike are flooding cities nationwide with properties, making today’s climate an ideal buyer’s market. Inventories of homes for sale are at record levels in parts of California, Florida and Nevada, and your buying dollars are in high demand. Today’s home builders and sellers want to make deals, so use your position to negotiate a few perks.
First, if you’re buying from an existing condo owner, ask for help with closing costs — the money you’ll drop on bank and appraisal fees, taxes and insurance when you take ownership of your new home. Closing costs can range from 1.5 percent to 4 percent of the value of your home, so it’s wise to ask for help with the thousands you’ll need to close the deal. You can also ask the seller to drop a couple thousand extra dollars to lower your interest rate. Many sellers and their Realtors would rather hand over a few incentives than lower their asking price.
If you’re eyeing a new condo or a conversion, Krac suggests you ask the builder to pony up some enticements that will help ease cash flow in your first year of ownership. Some communities will pay your first year’s worth of homeowners’ dues; others will cover a share of your closing costs or even pay a third-party title company to help you with your mortgage in the first 12 months.
Also, Krac recommends buying in a community less than 10 years old. A newer place will let you skip thousands of dollars in improvements such as fresh paint, carpet, cabinets and appliances. Most newer condos are in decent shape and don’t require the additional improvements.
If you’re still not sure about trading in your apartment for a condo, think about the lasting benefits of swapping renting for owning.
Buying a home is a form of forced savings — a way for you to build asset value that you likely couldn’t set aside on your income alone. A $200,000 home appreciating at just 5 percent a year will net you well over $30,000 in equity over three years.
“On a long-term basis, a home is still one of the best investments you can make,” Hodges says. “You’ll enjoy (price) appreciation and you can grow from a condo to a townhouse to a home. You’re setting the groundwork to enjoy homeownership for the rest of your life.”