Thursday, September 8, 2011

Just married! Should I stretch to buy now?

Many are wondering if they should buy a house now or rent in this uncertain market. There are some things to consider before you make your decision to see what might be best and fit with your overall financial plan.
Dear Sunnyview,
I am newly married. My wife is working right now, but we plan to start a family soon. My wife's credit is pretty good about 720, but mine is around 670. Jobs are stable, but we don't have much saved up yet. My family says that we should do whatever we can to buy, but we would have to pay about $300 more every month for a mortgage. Should we buy now before prices go up?
-Confused Newlywed

Dear Confused Newlywed,
First of all congratulations! It sounds like you are at an exciting crossroad, but you need a solid plan before you buy. I think that taking time to improve your credit, deciding what you can afford in your monthly budget and then looking for a house with a payment close to rent would give you good financial flexibility moving forward.

You would be wise to work on your credit before you buy. Both you and your wife would be able to qualify with your current scores, but the cost of getting a mortgage drops when you improve your score. Each mortgage company has "cut offs" for scores and being just above or just below that line can affect the rate you get and in turn the overall cost of the mortgage Improving your credit score gives you the most mortgage options at the lowest cost. Credit is not a mystery. There is a lot you can do to raise your score like keeping balances below 30% of the limit, paying on time and disputing incorrect information on your report. You can also ask some companies for a removal of a single late payments from your report if your account is current so be sure to ask them.

Next, run a calculator like this on the Dinkytown Mortgage Qualifier to see the monthly ownership costs including taxes and insurance on a home would be. Many lenders are happy to help you make a plan and see what you might qualify for, but it is a good idea to run the basic numbers for yourself to see what you can comfortably afford not just the maximum you can qualify for. It is a good idea to make a budget and see where your money is going before you buy. The best one that I have found online is Suze Orman's Budget Calculator. You can use it to find your own budget and you can also rerun the numbers without your wife's income to see what they would look like if she plans to take time off work when you have children. The amount of house you can afford should be dictated by your own budget not just the maximum in the standard mortgage ratios.

I do not know what your local market is like, but most markets are still finding their way to more stable values. The good news is that over time many markets are correcting so that the cost of owning is dropping to be more in line with local rents. Buying a house with combined mortgage, taxes and insurance costs (PITI) that is close to or less than rent is a good way to build equity over time. It does not provide you perfect protection from drops in the market, but it means that it is unlikely that you would ever be forced to sell due in a down market since you could cover the basic house expenses with rent alone. You can find Fair Market Rents (FMR) for your area on the HUD website and compare that to what you are paying every month now to see how the cost of buying compares to renting in your area.

My advice is to learn all you can, get your finances in order and do not rush to buy now. A prepared buyer is a happy buyer. Focus on your new family, improve your credit, save for a down payment and keep your eye on your larger plan as you move toward buying a home when the time is right.

All the best,

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