- - Thursday, August 25, 2011

The decision to move from renter to homeowner was simpler in 2005 for two reasons: First, real estate prices were on a trajectory that made buyers comfortable that the property purchase would be a good investment. Second, mortgage lenders made it easy for buyers to qualify, even if they lacked cash and had yet to demonstrate a pattern of creditworthiness.

These days, making the choice to buy a home requires more measured thinking about the emotional impact and the financial implications of purchasing a home.

“Most of the people who contact us about buying a home have already made the decision that they want to stop renting,” said David Getson, a Realtor with the Mandy and David Team in the Dupont Circle office of Coldwell Banker Residential Brokerage in the District. “Usually this is an emotional decision rather than a financial one, based on their desire for a dog, to start a family, to put down roots or just to have the ability to paint their walls whatever color they want.”

Mr. Getson said potential buyers must consider both their current lifestyle and the lifestyle they expect to have in five years or more in order to decide whether and where to buy.

“I tell everyone, ‘Make sure you like the place you are buying, because you may have to live in it for a long, long time,’ ” Mr. Getson said. “I also suggest that buyers consider the potential for renting a property in case they need to leave the area temporarily or permanently. Fortunately, the D.C. area has a strong rental market.”

Bennett Whitlock, a financial adviser and managing director of Whitlock and Associates in Lake Ridge, Va., said becoming a homeowner should be part of an overall financial plan rather than a simple rent-versus-own decision.

“Every financial decision should be based on a discussion of how you balance each choice with the ultimate goal of retirement,” Mr. Whitlock said. “Realtors and lenders want you to buy a home, and they have a vested interest in your taking out the largest loan and buying the most expensive home you can afford.

“But consumers are better off if they take the big-picture approach and evaluate how much they can afford to spend on a home while still saving for retirement.”

While many prospective buyers initially contact a Realtor, the first step for consumers should be to visit a lender. Most Realtors immediately put a potential homebuyer in touch with a lender who can discuss the details of financing and estimate how much the buyers can qualify to borrow.

“Job security is one of the most important topics to discuss with today’s prospective buyers because if the buyers are not fairly certain that their jobs are safe and they won’t be laid off, then they probably should not be trying to buy,” said Mark Goldstein, president of Capitol Funding in Rockville.

“In addition to job security, buyers need to consider how long they plan to stay in a particular home. For the most part, it doesn’t make sense to buy unless you will stay for six years or longer,” he said. “If you know you will be staying in the area for three or four years, it might make sense as long as you are willing to consider the possibility of holding onto the home and renting it at some point.”

Mr. Getson said holding onto a home for at least three to five years used to be the rule of thumb. In today’s real estate market, however, he said, buyers should assume they are staying for five years or longer to make sure they recoup their costs and see some appreciation in the value of the home.

“For many people, choosing to buy isn’t really a financial decision; it is more of a psychological choice to put down roots,” Mr. Getson said. “On the other hand, when you look at the rents in the D.C. area, it can make sense in many areas to buy because the costs are pretty similar.”

On the financial side, Mr. Getson said buyers are less interested in stretching their budget to buy a home these days.

“Buyers today seem to recognize that their comfort level with the monthly payment is more important than borrowing as much as they are approved for,” Mr. Getson said.

While Mr. Whitlock said it is best to avoid spending more than 33 percent of your gross monthly income on housing costs, he also recommended placing housing costs in the context of a complete budget that evaluates the household’s cash flow. In addition, he recommended that even homebuyers with confidence in the stability of their job keep significant cash reserves on hand.

“Homebuyers will need cash for the down payment and closing costs, and they also need to keep at least three to six months’ of cash available to cover their monthly expenses,” Mr. Whitlock said.

Mr. Goldstein recommended keeping cash reserves on hand to cover home maintenance and repairs.

“You don’t think about things like replacing the roof or the water heater when you are a renter, but homeowners need to have money on hand to pay for things like that and even just to pay for their moving expenses,” Mr. Goldstein said.

Mr. Goldstein said homeowners should make sure their housing payments and all other debts do not exceed 36 percent of their gross monthly income to be comfortable with their monthly payments.

“Some people feel they can afford to spend more than that, and others want to spend less,” Mr. Goldstein said. “Some loan programs will even allow people to have 50 percent of their gross income going to their debt (including mortgage costs) but those are limited to people with excellent credit.”

Mr. Goldstein said lenders generally require a minimum credit score of 620 for a borrower to qualify for a mortgage, with a minimum credit score of 720 to qualify for the lowest interest rates. In addition, lenders are looking for a job history of at least two years and require complete documentation of all income and assets.

“One way I recommend that prospective buyers prepare for homeownership is to take the difference between their current rent and their prospective mortgage payment and put that money in a savings account each month,” Mr. Goldstein said. “That way, they get used to the monthly payment and make sure they are comfortable with it, rather than finding out six months after they bought a house that they are paying too much for their mortgage.”

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