Investments for young professionals

Are you ready to make the home-buying commitment?
There are lots of pros and cons revolving around buying a home
versus renting one. The old advice that home buying always pays off
is no longer automatic in all parts of the country and for some
people.


Rent or Buy?
You should rent:
* If you don’t want the bother of home maintenance and repair
* If rental rates in your area are low (compared to home prices)
* If you plan on moving around a lot because of job or other commitments
You should buy:
* If you want to take advantage of (recently very high) equity appreciation
* If you want the interest and tax write-off from a home
* If you want added security and privacy


While you can spend a lot of time debating the rent versus own question, my suggestion is that if you’re even remotely interested in a home purchase, you at least move forward enough to find out what

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you can afford. After all, you can always opt out to stay/become a tenant.

Can I Afford to Buy a Home?
Once the decision to investigate buying has been broached, it
becomes a matter of determining what you can afford. To find out,
most prospective home buyers usually begin the traditional task of
putting together a budget of their income and expenses. Their two
big questions are, “How much money will I have to put toward a
monthly payment? How much money do I need for a down payment
and closing costs?” Unfortunately, this is like putting the cart in
front of the horse.
My suggestion is to stop, take a deep breath, and rethink. What your budget tells you at this stage is moot. Today it all comes down to what the lender says you can afford—how big a mortgage the lender is willing to give you. (It could be for 100 percent of the purchase price!) After all, you can always borrow less than a lender’s maximum (to reduce your monthly payment, for example). But, it’s very hard to borrow more.
If you bought a home in the past, say ten years ago, it may seem odd to go to a lender first, before you even do your own budgeting. But be aware that the process of buying a home has changed. Today your budget needs to come later. Your first questions should be, “How big a loan (and monthly payment) can I get?” For that information, you must contact a lender directly.


TRAP—DON’T RELY ON
SECONDHAND INFORMATION
You can only get the answer to how big a loan and monthly payment a lender will offer from a lender. Don’t make the mistake of thinking you can fill out a quiz in a book, go through some formulas, and get that information. Neither I nor any other author can realistically tell you what you can afford without knowing your specific financial information and without submitting that to a lender.



Should I Buy a Home?
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Therefore your first step is an easy one. You find a lender and get “pre-approved.” (This is something you will need to do in any event in order to get home financing, so it’s not a wasted or extra step.)
Pre-approval takes perhaps a half an hour or so of your time. You
contact a lender or mortgage broker (see where to find them in
Chapter 4), fill out an application, provide some documentation,
and that’s it. It might cost you $35 for a credit report (or it might
not, depending on how good your lender/mortgage broker is), but
that’s really a very small investment. You’ll have your answer in a few
days or less.

What Does Pre-approval Do for Me?
You’ll find out how big a monthly payment you can qualify for, the maximum size of a mortgage you can afford, and what size down payment you’ll need. (If you even need a down payment—in many cases no-down financing is available; see Chapter 4!)

TIP—GET A COMMITED
“PRE-APPROVAL” LETTER

Today virtually all lenders will take a look at your credit history, your income, and your assets and then, based on underwriting standards, issue you a “pre-approval” letter. It will typically state the biggest monthly payment their computers say you can afford. If they’ve actually gotten a credit report on you, checked with your employer, and looked at your bank statements, this is a pre-approval commitment that you can “take to the bank.”

TRAP—BEWARE OF BEING SIMPLY “QUALIFIED”
On the other hand, a mortgage broker or even a real estate agent can ask you a couple of financial questions over the phone and then send you a “pre-approval” letter.