PURCHASING A HOME CAN YOU AFFORD IT?
This sounds like a very basic question that everyone who anticipates buying a home should think about prior to entering into a contract of sale. Not giving some thought to this elementary but crucial calculation happens more times than you would think. This is no reflection of intelligence. It is more common that you think. First time homebuyers often get caught up in the thrill of the chase and make bids on homes they cannot afford or are prompted by a real estate broker, mortgage broker or seller who does not have best interests at heart. There have been a few times where I have represented a potential purchaser of multifamily home from a Seller whose business is the sale of “affordable” homes. On more than one occasion the Seller has urged them to use their “Purchaser’s attorney” and their title company. As part of the sales pitch, the in-house agent of the Seller justified the sale to my clients based on potential rents as a way of paying a mortgage that would not be able to afford. A primary question that I ask a client is whether or not they can afford the loan if the tenant is unable or unwilling to pay the rent. If the answer is no, I ask the client to consider this when purchasing the home. The seller of these affordable homes would push the purchasers to closing as quickly as possible (sometimes entering into contract and closing on the same day) otherwise someone else would purchase this great deal out from under them. To make a long short, neither transaction closed.
When purchasing a home or investment, in addition to the amount allocated towards the down payment, you will need to consider the costs charged by the bank and title company at closing. Some of the bank fees will be paid prior to closing but a majority of the fees due the lender will be paid at closing. The lender is required to give you and you should request a good faith estimate of closing costs from your loan representative or officer. You will be required to get title insurance for any lender you elect to use in addition to title insurance for you as the Purchaser. The lender needs insurance to insure that they have a valid lien against the property to secure the loan. When you are purchasing a home, many times the bank will require that you pay for a provide proof of one year’s worth of liability insurance for the home.
Lastly, you will need to determine if you will be able to afford your new home on a monthly basis. Many people who contemplate purchasing only consider the monthly principal and interest charged. In addition to monthly payments of principal and interest, you may be required to pay monthly installments of real estate taxes, hazard insurance and private mortgage insurance (“PMI”). PMI is charged if your loan amount is higher than 80% of the value of the loan. The bank if escrowing will require payment of a monthly installment of that annual premium so that at the end of the first year there will be enough money to pay the following year’s premium. Additionally there are payments of utilities (phone, electric, gas, water and sewer) to consider.
In considering all of the purchasing and carrying costs of your new home there is a quality of life issue to consider. Even though you may be able to pay all of your bills, you should leave yourself enough of a monthly cushion that can pay your current other sundry expenses and food bill. You do not want to over leverage yourself so that you spend all of your time in your brand new house sitting on a milk crate, living on crackers and water.