From Here to Home
Sunday, March 25, 2007
As Jeff Gill tells it, he grew up in a family that does not believe in renting.
His older brother bought a condominium soon after college. His older sister recently bought a condo. His parents constantly laud the benefits of homeownership.
"I would have never heard the end of it from anybody if I rented," said Gill, 24. "They all think rent is a waste of money, and they would have kept bugging me about it."
So after graduating from George Mason University two years ago, Gill moved in with Mom and Dad, whittled down his debt and pocketed enough money for a decent down payment that his parents have agreed to supplement.
"Now, my biggest concern is about what I can afford given my salary," said Gill, a human resources professional who earns about $50,000 a year. "At what point would I be pushing the envelope?"
People often consult a mortgage broker or lender before they start house hunting to answer that question. Gill spoke to James E. Hensley, a managing director at the McLean office of First Savings Mortgage.
Gill told Hensley he wants a condominium for about $275,000 in Arlington, not far from his office. That's doable, Hensley concluded after examining Gill's finances.
For starters, Gill's credit score, used to measure creditworthiness, is an impressive 767 out of 850.
His monthly debt-to-income ratio, meaning how much debt he owes compared with how much money he earns, should be no cause for alarm.
A mortgage for the kind of home Gill wants would eat up a good chunk of his salary, Hensley said. That makes his debt-to-income ratio high, but it would still be at an acceptable level because Gill carries no other debt.
"He's a little tight, but that's not uncommon for somebody at his stage in his career, where he still is not making a lot of money," Hensley said. "Most likely, he will grow into the mortgage."
Besides, Gill appears to be a saver. He has already stashed away $5,300 in an individual retirement account, and he has about $400 in a 401(k) plan. It's not much, but it shows the kind of financial discipline that puts lenders at ease.
"It's money that can be used for reserves," Hensley said. "We always check to see if a person has something to fall back on, even if it is money for retirement."
As Gill tells it, his record has not always been perfect.
During college, he rented a room in a friend's condo for about $500 a month. Though Gill had a full-time job at the time, he sometimes fell behind on payments.
"So I would borrow money from my parents," Gill said. "I was putting myself in debt with my father, and I already owed him money for buying my car halfway through college."
Dad, an accountant, bought the car and Gill paid him $475 a month.
"At first, he would charge me interest so I understood that it made sense to pay off as much as I could," Gill said. "Then after a while he made it interest-free."
Gill won't have that luxury with his mortgage, of course. His parents plan to kick in $10,000 toward a down payment, and Gill expects to contribute a few thousand dollars of his own and pay the closing costs.
Assuming Gill puts down 5 percent, or $13,750, Hensley suggested a first mortgage of 80 percent of the purchase price -- $220,000 -- and a second mortgage of 15 percent, or $41,250. That way, he will not have to pay for private mortgage insurance.
Buyers who put down less than 20 percent of the purchase price of a home otherwise must pay that kind of insurance, meant to protect the lenders from the added risk they're taking on. In Gill's case, the insurance would add about $108 to his monthly payments.
With these two mortgages, Gill would pay a slightly higher interest rate on the second mortgage, "but having mortgage insurance would be a more expensive option," Hensley said.
In the current market, he said, the first mortgage could be a fixed-rate 30-year loan at 6.25 percent with interest-only payments for the first 10 years. That would cost $1,146 per month, as opposed to $1,355 for a traditional fixed-rate loan at that rate. The second mortgage could be a 25-year fixed-rate loan at 8.25 percent with interest-only payments the first five years. That would be $279 per month.
With both loans, when the interest-only period ends, Gill would either need to refinance or face much higher monthly payments. For now, though, Hensley said the arrangement, "helps him qualify for more and keeps his payments lower."