Time to buy your first home?

Lots of stories in the news over the last few weeks have talked about the recent drop in home ownership rates across the U.S. A new review of census data conducted by Harvard University's Joint Center for Housing Studies and the Associated Press shows 33.6 percent of American households are now renters, up from the 31.6 percent of households who rented before the collapse of housing in 2007. Put another way, this represents an increase of over three million renters over the last several years, and the forecast is for this number to double by 2015.

Even international housing reports seem to suggest that people are beginning to give up on the idea of home-ownership. A recent report from moneysupermarket.com revealed that 31 percent of British people – the equivalent of six million individuals – who do not own a property said it was highly unlikely that they would ever consider buying a house in the future.

Ever? Putting aside EQUITY’S nearly fanatical interest in building wealth through assets, perhaps those six million British citizens should be reminded of certain universal economic principles. Whenever there is an increase in demand for something, be it service, product or even housing, a resulting rise in expense can usually be observed, and rental costs are no exception.

From 2006 to 2009, rental prices on average increased by more than 15%, according to Moody's Analytics economist Andreas Carbacho-Burgos, and an additional 4.1 percent from 2009 to the end of 2010, while a recent rent.com report projects 2011 rents to rise by 4.5% and an additional 3% in 2012. For those of us keeping score at home, this means an apartment that rented for $1,000 in 2006 will, in 2012 rent for $1,296.50 for the very same rental unit.

When talking of home ownership, it is critical to keep in mind its stability, predictability and  wealth building capacity; after all, a fixed rate mortgage payment will remain steady as one’s friends rental expenses continue to rise as in the preceding example.

According to a recent Urban Institute study on income and wealth distribution, over forty percent of middle class wealth is still represented by the value of one’s home. According to Anne Marie Kelly, SVP of Marketing & Strategic Planning at GFK MRI, "Despite our current real estate depression, home ownership has also traditionally been one route to wealth.”

Remember that since 1950, home prices have on average outpaced inflation by an annualized 0.26 percent. But let us be clear, this is not an article on getting rich quickly or flipping homes to try and make a quick dollar, but rather the building of financial assets slowly via enforced savings. Warren Buffett, who has famously, despite his billions, lived for more than 50 years in a home that cost him $31,500, addressed this very issue in his latest letter to shareholders of Berkshire Hathaway, "Our country's social goal should not be to put families into the house of their dreams, but rather, to put them into a house they can afford."

Yes, affordable, and we would add the term sensible: no reverse amortized mortgages or interest only time bombs or 6,000 square foot mini mansions with 3 car garages, but a home, a solid modest investment to build roots in a community and create both financial and personal autonomy.

Another benefit of home-ownership is the often ballyhooed tax considerations. Particularly in the early years of a traditional 30 year fixed rate mortgage, most of the payment is deductible against one’s income. A recent realtor study reports that the average Washington state taxpayer saved $3,565 in taxes as a result of the deduction on their mortgage interest in 2008, a significant savings to a middle-income family.

According to Fannie Mae’s National Housing Survey, “Americans cite income, credit history and down payment as the biggest obstacles to homeownership with credit history being the top reason given by renters.” Despite the bursting of the bubble, there are still programs tools and strategies to help people, including people with disabilities, who really want to buy that home, qualify for a mortgage, build a down payment and clean up their credit. Federally funded IDA accounts are one way to both accumulate a down payment and build a better credit score through the included financial education classes.

Some IDA home purchase programs provide as much as a six to one match for savers wanting to become homeowners, but many programs across the country provide matched savings at a two to one rate.  For more information about IDAs and how to find a program near you, please visit: http://www.acf.hhs.gov/programs/ocs/afi/states.html.

One popular home financing tool is a loan product offered through the Federal Housing Authority (FHA). Current FHA loans require as little as a three and one half percent down payment of the total purchase price and also tend to have more flexible underwriting requirements than conventional mortgages. In addition, FHA loans can often be combined with local city or municipality down payment assistants’ programs which limit borrower’s commitment to 1% of the purchase price of the property. Another unique aspect to these loans is that they allow unlimited gifted funds from relatives and permit a non-occupant co-borrower yet have competitive interest rates. An additional benefit to these loans is the (203) provision which allows for the cost of renovations to be built into the financing, ideal for accessibility renovations such as a ramp or similar modifications.

With down payment and financing addressed, the question becomes how much home can one afford? Following the so-called bursting of the real estate bubble, mortgage lenders are being more selective regarding lending criteria. Some reports in the news makes it sound like it is nearly impossible to qualify for a mortgage, but that is simply not the case. While it is true dead people and the family pet are finding it more difficult to qualify for a mortgage, people with reasonably good credit and an actual down payment are able to get a loan. Many financial professionals use the ratio of 28% as to how much loan you can afford.  That number is a ratio of your debt to income, monthly debt (car payments, credit cards, student loan payment, etc.) such total debt ideally should be less than a third of one’s gross income, the lower the better. For a calculator to help you figure just how much home you can afford, visit: http://www.hughchou.org/calc/howmuch.cgi.

But remember, the goal is not to buy the most expensive house you can afford or even to substantially increase your living space. Moving from a 900 square foot apartment to a 2000 square foot house will mean filling those extra rooms with furniture, and then there is the upkeep to a house: property taxes and insurance – the mortgage is just the beginning of affording a home.

Another powerful home buying option is the Section 8 rental assistance voucher program. Many people with disabilities are familiar with the rental component of this program, but it comes as a pleasant surprise to many that in some areas Section 8 voucher holders can use the same program and voucher to pay a mortgage. The value of the voucher, as with the rental program, depends on the number of bedrooms secured by the voucher. That dollar amount, which also depends on the local market, can be used to pay a monthly mortgage payment just as if one was paying rent. The big difference is that with the Section 8 homeowner voucher, recipients are building equity on their way to building a more secure financial future for themselves and their families.

To register for the program, interested Section 8 participants should contact their housing authorities’ home ownership coordinator. Be sure to attend all the program's required counseling sessions and classes. Classes will include valuable financial education, and it is also worth noting that the programs mandatory employment requirement is waved for participants with disabilities. The Section 8 Home Ownership Coordinator will refer qualified applicants to a program lender for loan approval and may even be able to refer program participants to a qualified realtor familiar with the program and real estate market.

This program is complicated, but as with most things, patience is rewarded.  This can be a complicated process, sometimes taking as long as two years from beginning to end, but no one ever said building a better financial future would be easy!

Home ownership, when approached in a deliberate intelligent way, still provides the promise of a more financially secure future. A home with a purchase price of $200,000 over the period of a thirty year mortgage will, according to historical returns, appreciate on average 3% per year.  At the end of that mortgage, the same home, purchased for $200,000, will conservatively be worth $492,000 and be unencumbered by a mortgage obligation. 

Home ownership is not easy. It requires patience, planning and sacrifice over long periods of time, but in the end provides access to one of the best and most time proven asset building strategies for all Americans, including those with disabilities.

For more information on Section 8 Housing Voucher and the FHA mortgage, check out this site at: http://www.accessiblehomesforyou.com.