Financial Awareness Bulletin

Vol. XIII, No. 5
February 2005

Homeownership for Singles

Summary Homeownership is a major goal of most people because of its many benefits. The homeownership process for single people consists of determining how much can be afforded, pre-approval of a mortgage loan, selecting the property, the mortgage loan down payment, private mortgage insurance, loan closing costs, and the sale.

INTRODUCTION

Homeownership is a major goal of most people because of its many benefits.  Along with owning your own home comes a sense of security that cannot be found through other means.  For many, homeownership represents personal and financial success.  However, many single people feel that homeownership is beyond their reach.  This Financial Awareness Bulletin reviews the ways singles can afford a home of their own.

BENEFITS OF HOMEOWNERSHIP

There is much personal satisfaction in living in a home that you own.  Instead of renting every month, a home is a valued investment which can have many financial advantages and tax benefits.  The amount of interest you pay on a home loan and the real estate taxes you pay on your home are among the few remaining federal tax deductions.  In addition, owning a home is the primary way most people build wealth.

HOMEOWNERSHIP PROCESS

The homeownership process for single people consists of determining how much can be afforded, pre-approval of a mortgage loan, selecting the property, the mortgage loan down payment, private mortgage insurance, loan closing costs, and the sale.

How Much Mortgage?

Before we review the different types of home financing, it’s important to understand how the size of a mortgage is determined.  There are two basic formulas commonly used by lenders to calculate how large a mortgage you can reasonably afford.  These formulas are called “qualifying ratios” because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.  The ratios discussed below are guidelines only—ratios vary from lender to lender, and each loan application is handled on an individual basis.

Generally speaking, to qualify for conventional loans (loans that are not obtained under a government-insured or guaranteed program), the first qualifying ratio requires that housing expenses should not exceed 26 to 28 percent of your gross monthly income (the Federal Housing Administration loan ratio is 29 percent of gross monthly income).  Monthly housing costs include the mortgage principal, interest, taxes, and home insurance (often abbreviated PITI).  For example, if your annual income is $45,000, your gross monthly income is $3,750, times 28% = $1,050.  So you would probably qualify for a conventional home loan that requires total monthly payments of $1,050.

The second qualifying ratio involves all long-term debt as it relates to gross income.  Any expenses that extend 11 months or more into the future, such as a car loan, are considered long-term debt.  Total monthly costs, including PITI and all other long-term debt, should equal no greater than 33 percent to 36 percent (41 percent for FHA loans) of your gross monthly income for conventional loans.

Use the calculator at http://partners.leadfusion.com/leadfusion/neacalc/home17/tool.fcs to determine how much to spend for housing.  Be sure to only include income you can definitely count on.

Pre-Approval of the Mortgage Loan

Before you begin house-hunting, it’s a good idea to get pre-approved for a mortgage loan.  This will help you to determine in advance what price range you can realistically afford and the mortgage amount you will qualify for.  Getting pre-approved will also put you in a stronger bargaining position with the sellers.

Property Selection

Besides price range, there are many other factors to consider when purchasing a home.  It’s in your best interest to take care in selecting a home that will have lasting value.  Be sure the neighborhood and house meet your needs.  Also consider the availability of public transportation and how far you will have to commute to work (check out the commute during your regular driving times if you plan to drive to work).

Assess the condition of the plumbing, heating, and electrical systems and whether they are up to local (city or county) code regulations, even if the house is brand new.  The best and easiest way to do this is through a certified home inspection, from a certified inspector (refer to the American Society of Home Inspectors; www.ashi.com).

Once you have found a home and the seller has accepted your offer, you will need to pay an appraisal fee so that the lender can have the property appraised.  The lender will then be able to provide you with a final loan decision.  If you are denied a home loan, the lender must explain the reasons.  If this happens, the lender will usually discuss any options with you.

Down Payment

Saving the money for a down payment is the biggest obstacle to homeownership for most people, especially single people.  Years ago, lenders required that home buyers make a down payment of at least 20 percent of a home’s purchase price in order to get a mortgage.  However, these days mortgage lenders will grant home loans to qualifying home buyers with a down payment of as little as three to five percent of the purchase price, if the mortgage is insured (see private mortgage insurance described below).  In fact, home loans with down payments of less than 20 percent are becoming the norm for single buyers. 

Private Mortgage Insurance

Simply put, private mortgage insurance (PMI) protects the mortgage lender against financial loss if a homeowner stops making mortgage payments.  Lenders usually require PMI on low down payment loans (i.e., loans with less than a 20 percent down payment).  When a homeowner does not make scheduled mortgage payments, a default occurs and the home goes into foreclosure: the homeowner loses the house and all of the money put into it.  The mortgage insurer then has to pay the lender’s claim on the defaulted loan.  For this reason, it is crucial that the buyer can really afford the home – not only when he or she buys it, but throughout the time period of the loan.

Closing Costs

Closing costs, or settlement costs, are paid when the home buyer and seller meet to exchange the necessary papers for the house (or unit) to be legally transferred.  On average, closing costs run approximately two to three percent of the home’s price (depending on location).

Closing costs include the loan origination fee (if not already paid), prepaid homeowner’s insurance, appraisal fee, lawyer’s fee, recording fee, title search and insurance (to protect the buyer), tax adjustments, agent commissions, PMI, and other expenses.  Points, which are prepaid interest charges (example one point is one percent of the loan amount), may also be applied at the time of closing.  There is a relation between the interest charged on the loan and the number of points paid at closing: the more points paid, the lower the interest rate, and vice versa.

The Sale

Purchasing real estate is a complicated process.  Even though you may be well educated and knowledgeable about the latest real estate trends, it’s still to your advantage to have a real estate agent represent you (referred to as a “buyers agent”).  Remember that the seller’s agent represents the seller, not you.  Your own agent can help you through the entire homeownership process, including negotiating contract terms with the seller.

NEA MEMBER BENEFITS

Learn more about the home buying process with our new video: www.neamb.com/newhomevid.  NEA members can get pre-approved for a mortgage through the NEA Home Financing Program^®.  Just call 1-800-NEA-4-YOU (1-800-632-4968) to speak to one of Wells Fargo Home Mortgage’s experienced home mortgage consultants.  They are available from Monday through Friday, 8 a.m. to midnight, and Saturday, 9 a.m. to 5:30 p.m. (ET).  Be sure to ask about the current member bonus offer.  If you prefer, you can stop by your local Wells Fargo branch, or visit us online at www.neamb.com/loans/hmfpge.jsp.

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