Who would have thunk it? Peter is on his way to building wealth, and he only makes about $40 G's a year! His credit isn't stellar, either (Sorry for blowing up your spot my dear), but here is another Home Buying Scenario that we can dissect and use as an example of financing a Real Estate Purchase AND Refinance.
So here's what we know:
Peter's Gross Income (as opposed to Net Income) is about $40,000/yr or $3,333/mo. He has a couple Trade Lines such as a Credit Card and Debit Card. Like my earlier Article on Credit Scores mentioned, Credit Bureaus like to see 3-5 Trade Lines that have been open for 24 months or more. This is why Peter's Credit Score is not in the 700s. As for monthly obligations such as Credit Card payments and/or car payments, he has close to none, besides his monthly rent. Lenders like to see that you have been renting for a continuous period, preferably for the last 2 years, and the way they Verify that is through a Verification of Rent/Mortgage form. Lenders prefer that you can handle a huge monthly obligation like paying Rent and therefore want to be able to Verify it(have your Landlord sign a document stating how much Rent you pay, blah blah). Peter had been renting for the last year and throughout college so in that aspect, he is fine.
The fourth category Lenders look at is your Assets, which Peter had plenty of. Lenders like to see 6 months of PITI m(principal, interest, taxes, and insurance) seasoned for two months in a checking/savings/stock account for 2 or more months. Lenders want to be sure that you have some extra back-up funds to pay that Mortgage if you unexpectedly get fired or injured or have a nervous breakdown and move to Nicaragua. In Peter's case, he put $300,000 down on the house so that his remaining Loan Amount was $85,000, a 22% LTV (loan to value) ratio. Because of his significant Down Payment and low LTV ratio, Lenders will have no problem issuing him a Loan. He has a 6.5% Interest Rate on his $85,000 loan amortized for 30 years which is $540/mo. His monthly Property Taxes comes to about $400/mo and his Homeowners Insurance is about $70/mo. There is also an HOA fee(homeowners association) which is an account set aside for maintenance of common grounds or payment of utilities like water and sewer in the co-op or condominium complex. This usually runs about $100-250/mo depending on the amenities of your building. Thus, Peter's total monthly outlay is about $1160/mo, which is TADA! probably how much you are paying for Rent.
Ideally,Peter should keep his Co-Op for at least 2 years. Real Estate Tax Law(thank you George Bush) states that you can claim up to $250,000 TAX FREE PROFIT from the sale of your home if you have lived in it for 2 or more years and $500,000 TAX FREE PROFIT if you have someone else on Title (like your husband or wife). If this LAW wasn't in place, you could get taxed up to 50% of the Profits! Poo Poo Uncle Sam shame on you. Thus, for Peter to re-coup his $300,000 down payment TAX FREE, he should add his mom or dad or boyfriend or best friend on Title as Joint Tenant with established Equitable Interest in the property, which takes the form of Mortgage payments. Peter, we'll chat more about that later.
BOTTOM LINE is:If you are thinking about buying property, ask yourself a couple questions: Am I planning on living here for at least 2 years? Do I have a secret Trust Fund Aunt Sherry started for me? Will my parents lend me a couple thousand bucks for a Down Payment or at least an Escrow Deposit? Have I checked my Credit Score lately? Do I have an Investment Plan or Goals? Yada Yada, you get it. This shit takes some planning. As my Uncle Bill always says, an ounce of prevention is worth 10 lbs of cure. So start taking steps now so that when you do decide to buy, you don't get screwed by the BANK.
To see Peter's full NY Times Article, please visit the web site below:
http://www.nytimes.com/2006/11/12/realestate/12hunt.html?ex=1164085200&en=7b7b1ae81763a98e&ei=5070&emc=eta1
First Off, Why Buy a House?
1. Rent: You are literally throwing away thousands of dollars a year, financing your landlord's vacation to the Bahamas, not to mention footing his/her mortgage payments while the cheap bastard earns equity appreciation to buy more property, a sweet Benz, and a new Kitson wardrobe while they're at it. It's a vicious cycle people. And your landlord is laughing all the way to the bank (and at that tacky oriental rug you refuse to get rid of).
2. Tax Benefits: Do the math kids - On a $350,000 investment, Uncle Sam will cut you a break of $4375 a year or $365 a month! I could have used this Tax Shelter last year, in which for the first time ever, I had to pay taxes, $2500 worth of taxes. I almost came Joe Leiberman close to becoming a Republican. Phew.
3. It's Yours!: Do what you want, when you want, with what you want to your house. No more rental deposits gone awry, no more awkward/heated encounters with your landlord, no more creepy craigslist roommates, no more nonsense.
4. Building Wealth: Real Estate has averaged 8% appreciation a year in the last 40 years. Take that NasDaq. It is the only investment where you earn a return TWICE: one from your down payment and one from the appreciation of home value. It is tangible, you live in it and it will probably be the biggest investment of your entire adult life. Ask anyone who bought a house ten years ago and they will tell you that the equity in their home financed: a child's education, an investment property or 2nd home, a family vacation, a new car or boat, a home renovation, an Art piece, you get it, right? Point is, purchasing a home will happen naturally for most people, but why not now? Why wait til you're 30? Who know's where house prices and interest rates will be? Time is the greatest factor in any investment. And if I can do it now, so can you. Cheers.
Monday, November 20, 2006
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1 comment:
Freya,
A couple of notes. My utilities are only about 40 a month so I really pay 1050 which is still well over a third of monthly income after taxes, which leaves me with about $32 a day after my major expenses are paid; gym; cable; phone; homeowners insurance and netflix. This is not much for those of you who know New York, but I am happy as a clam - I cut most of my costs on food - eating nutri grain bars for two meals a day and eating at my staff cafeteria for lunch. I have also stopped drinking alcohol which is a total money zap. I use the money i dont spend on Zara Men and airline tickets to places like Palm Springs, Australia and Egypt. It's a fine life on 40K. One thing I am well aware of: not all of us bashed our jaws when we were, and if you did your parents just assumed it was your own fault - Not I. so hence the ability to put down such a huge down payment. That said, most people know reasonable adults who have something to contribute to you (anywhere from a 5k to a million depending on if you're Nader or someone a bit more average). Go to them with a smart, well thought business plan and a realistic estimate of what you can spend in a month. They will be happy to help if they realize how smart you are being. I am a 25 year old homeowner in Midtown Manhattan - dreams can come true - and I dont even live in a shoebox.
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