Buying a home is a major milestone, and probably one of the most significant purchases you’ll ever make. The idea of coming up with a large down payment and taking on a 30-year mortgage could be enough to scare most people away from the process altogether. But if you think home ownership is out of the question, Cecelia Marlow, Vice President at The Federal Savings Bank, suggests you think again.
We spoke with Marlow about what you need to know before you purchase your first home, and the resources available to help you find the best situation for your family.
These days a lot of young people think they’ll never have enough money to buy a home. What would you tell them?
A common misconception is that you need a 20 percent down payment to purchase a home. The reality is that many first-time buyers put down anywhere between three and five percent, a fact that makes buying a home much more attainable. There are also tons of first-time home buyer grants that can help offset the required down payment. At least 50 percent of the people I work with qualify for some type of first-time home buyer grant.
I do believe that you should be financially responsible. Don’t come to the closing table and write that final check if you only have ten dollars in the bank. Because you’re going to want to buy towels, sheets, and other things for your new house. A lot of the guidance I give people on the front end of the home buying process is around preparing to be financially stable from a credit and budget perspective.
How should you determine your budget?
A general good rule of thumb is to multiply your annual income by three to find the price point you’re going to be looking at. Your housing expense should never be more than 30 percent of your income. I’m a conservative person, so I like to look at the net income. It’s more realistic to consider what you’re actually bringing home, but the bank will qualify you on gross income.
Is there a recommended amount you should have in savings before you buy?
I would recommend a minimum of three months of expenses. Six months would be comfortable, and if you’re just an aggressive financial person, 12 months is the goal. But don’t rule yourself out if you don’t have 12 months. We’re currently in a very low-interest-rate environment. When I first started in 2003, the average interest rate was about 12 percent. Today, interest rates are between 3.65 and 4.5 percent. The interest rate environment gives you more purchasing power because your interest rate is multiplied by your
purchase price to determine your monthly payment. That means, the lower the interest rates, the more you’re going to qualify for. And over the long term, you’re paying less for that home.
When I’m approving people for loans, I tell them that I can’t promise them the same 4 percent interest rates will be available next year. And if they go up to 5 percent, I’m probably going to have to take 25 – 30 thousand dollars off of their purchase price approval. You definitely want to weigh where you are financially, but when you’re in a position to buy, just go buy.
What should you do if you are priced out of your dream neighborhood?
Some neighborhoods have declined in value, but real estate has always been a great investment.
My grandmother bought her house in Morgan Park in 1959 for around $20,000. And although Morgan Park isn’t one of the most desired areas in Chicago, my family could get at least $160,000 for that house if it was on the market today.
Real estate always appreciates over time. I don’t care where you buy. For example, Englewood is an area where you see a lot of boarded-up homes. But there is a Whole Foods on 63rd and Halsted, and the city just spent massive amounts of money on improvements to Kennedy King College. It might not be the most desirable place to live today, but within the next 10 years, the indicators are showing that it will be a neighborhood we can’t afford. It’s almost like Bronzeville. Years back, you could get a condo for 10 to 20 thousand dollars. Now the condos in Bronzeville are a couple of hundred thousand dollars. You have to keep your ear to the ground and be engaged in what’s going on within the neighborhoods and the wards so that you understand.
The idea of a 30-year mortgage can be intimidating to some buyers. How do you know when you’ve found the perfect house?
People often go into the process thinking that when they move, that’s it. But the first home isn’t always the dream home. National statistics show that most people stay in their first home for about five to seven years. If you look at the first home as an investment, you’ll have some appreciation. And when you sell, you can use the cash as a down payment on a larger house.
I also like to talk to people I work with about Multi-Units for Millenials. Chicago has a lot of two to four-unit buildings. And a lot of people don’t know that you can purchase one of those buildings with little more than 3.5 percent down. So if your first
purchase is a multi-unit, you have additional income the day you move in. Then you have not only cut your mortgage payment in half in many instances, you can begin to save the money you’ve been used to spending on rent. For people who are open to that idea it’s great, because you’re starting the ball off in an investment position.
Is it better to spend a little more money on a home that is move-in ready or to look for a fixer-upper that is less expensive?
I think it depends on perspective. Some people need to be able to walk in and see exactly where the furniture is going, and want something move-in ready. But when you find a home you want to buy, I encourage you to have a home inspection, which is different from an appraisal. Because even if you find a beautifully rehabbed home that looks amazing, you want to make sure all of the major systems are in good working condition. A home inspection can give you some peace of mind because it will let you know if you’re going to have to buy a new furnace in a couple of years.
But for those who are looking for more DIY opportunities, there are renovation purchase loans that allow you to receive renovation money to upgrade the home. When you’re applying for a renovation purchase loan, we do require you to get a general contractor, who we will vet. That safeguards you and the bank from the risk of using a faulty contractor.
There have been issues with predatory loan practices, particularly against people of color. What can people do to protect themselves from a potentially dangerous financial situation?
I’m always a big proponent of education. I host regular homebuyer education classes to help people understand the process and get familiar with the terminology. It’s often easier for someone to ask me to explain what a certain lending term means in a classroom setting. There are also a lot of counseling agencies that offer homebuyer education courses. HUD’s website will give you a list of approved housing counseling agencies by zip code. I’m not a big fan of Googling. It might be a good start, but you definitely want to have someone or some organization that you can plug into because the information is constantly changing. A lending practice that may have been feasible this time last year could potentially be outdated today.