Q: I am single and have about $7,000 in savings. My current salary is about $22,000. How much savings should I have before I get serious about buying my own house? When should I look for a real estate agent? I have concluded that I really do not want to buy a condominium, but wonder if I will ever be able to afford a house in the Washington, D.C., area. Is there hope?
A: Yes, there is hope. I am the eternal optimist, and know from considerable experience that there are ways to buy that house now, even with your current financial situation.
First you should contact some mortgage lenders, to determine exactly the kind of loan for which you will qualify. Some generalizations can be made, but you should not rely exclusively in these statements. Different lenders treat loan applications differently, and each borrower has a different set of financial circumstances to be considered by the lender.
However, here are some general rules of thumb:
* You probably can afford a house in the price range of double your salary. Most lenders will lend to you if the total monthly expenses for principal, interest, taxes and insurance (referred to as PITI) do not exceed 28 percent of your gross monthly income. Furthermore, if you have any long-term debts -- such as student loans, car payments, etc. -- the combination of the PITI and the long-term debts cannot exceed approximately 36 percent of your monthly income.
Again, these are only rough guidelines, and lenders take into consideration many other factors, including your stability of employment and your credit history.
* There are many kinds of loans available to you, ranging from fixed 30-year conventional to one-year adjustable-rate mortgages. You should sit down with your financial counselor and a potential mortgage lender and obtain a complete explanation of how these loans work, and how they will affect you.
* There are many other ways to purchase a house that you should consider. For example, as this column has suggested in the past, the shared-equity concept makes a lot of sense, and you should discuss this arrangement with real estate agents in the area. It is possible that you can find an investor who would be more than happy to join you in the purchase of a property, and this will enable you both to buy a house more expensive than you currently can afford by yourself.
There also are circumstances under which sellers are willing to take back financing themselves. This will save you a considerable amount of up-front money, since you will avoid having to pay the lender charges, such as points, appraisal fees, credit reports, and private mortgage insurance. Many people in the Washington metropolitan area who purchased their homes years ago have now paid off the mortgages and want to retire in another area. You certainly should explore the possibility of buying a house and having the seller take back all of the financing for a period of years.
For example, if you purchased a $60,000 house, and were able to persuade a seller to take back $55,000 in financing at 11 percent, your monthly payment would be $523.78. This is only for principal and interest, and, of course, would not include taxes and insurance. Under this scenario, the mortgage would be amortized over 30 years, but the entire balance would become due, for example, in five or seven years. Under this approach, you would have a house, and hope that the appreciation over the next five years would give you the ability either to buy another house or at least to build up some equity in one you're buying.
Clearly, in this example, under the traditional lenders' approach, the PITI exceeds 28 percent of your gross monthly income, and thus you would not qualify for a commercial loan. However, if you are comfortable with the monthly payments, it is an option to be considered -- if you find the right house and the right seller. Have you also talked to your family, and asked them if they will give you a gift or a long-term loan to assist in making a down payment on a house? This is yet another avenue which should be explored.
* Finally, have you talked to your friends and acquaintances? They may be willing to join you in a house purchase, thereby enabling you to share the expenses.
The possibilities are many if you sit down and explore all the options. You should consult local real estate agents. While they cannot represent you, since they will be paid a commission by the seller, they certainly can assist you in finding the right house -- with the right type of financing.
Yes, there is hope. And, in my opinion, it does not pay to wait until next year, since the price of housing may very well be higher, and you still may consider yourself "priced out of the market."