Get out of the rent trap

Just like many people, I was once a tenant. Like them, I dreamed of owning a home but couldn't find the courage to act and realize my dream. For years, I paid monthly rent to the owner of a huge apartment complex.

At first, it felt okay to live in the well-maintained complex. It had a huge swimming pool, several laundry rooms, and it was near the school and the church. But as the children grew up and we purchased more furniture and appliances, the apartment seemed too cramped.

When the children learned to drive, we had to buy additional cars, and parking became a problem because there was only one parking slot for every tenant. Once, my daughter decided to throw a party on her birthday, they had to barbecue in that small patio, and some guests had to stay outside. And when it was way past 10 p.m. and they were still partying, the apartment manager knocked on the door to complain.

But these problems of having cramped quarters, and lack of privacy is nothing compared to the problems of other tenants.

Take the case of one Jo Bessell, an elderly woman who has lived in the same apartment unit in Newport Beach for 28 years. When she first rented the unit, she paid only $275 per month. Through the years, the rent steadily climbed to $1,160 per month.

Then last year, the apartment complex was sold to another owner, and the rent was raised by another $465, making her rental payment a staggering $1,625 per month! The increase from $275 to $1625 over a period of 28 years represent a 21% average increase per year, or a staggering 590% over 28 years! The 83-year-old woman is now paying more than two-thirds of her monthly income from Social Security and mutual fund dividends on rent.

The poor woman is left with only two choices -- either to pay the higher rent, or move out.

At least, the poor woman had two choices. What if the landlord says his daughter is getting married and will need the unit or house that you are renting at the end of your lease? There will be just one choice left -- to move out!

Many people are caught in the rent trap, making their landlord rich with their rents and yet not having control over the way they conduct their lives in their rented homes or apartments, nor over the length of time they can stay in these dwellings.

Since you will be paying money for living in a home whether you own or rent it, doesn't it make sense to be the owner?

Just imagine the benefits of home ownership against renting, and you should be planning by now to buy that first home of your dreams.

By owning your own home, you control your life. You can barbecue and party with family and friends anytime you feel like doing it. You can paint your house red or orange for all they care. You can remodel your kitchen to your liking, replace the front door, add a bedroom or a den, or plant tomato in your backyard.

Nobody can tell you to move out of your house, unless you default on your mortgage payments.

More importantly, you build equity and derive additional benefits from appreciation of your property. In addition, you earn more savings because your mortgage interest payments and property tax payments are deductible for income tax purposes.

These financial benefits - building of equity, appreciation of the value of your home, and tax deductions -- should be worth the difference between your monthly mortgage payments and monthly rentals.

By buying a home, the monthly payment you make to occupy a home becomes an investment, instead of rent.

Imagine if Mrs. Bessel had instead purchased a house 28 years ago even at a monthly mortgage payment double the initial rent he had to pay. Assuming she availed of the 30-year fixed rate, she would still be paying less than $600 a month, and she would have paid off her home loan in two years! And the house she should have purchased would now be worth over $1 million considering that it is located in Newport Beach, a known enclave of the affluent.

Anyone who has had the courage to take control of his life and bought a house would tell you owning your own home makes a lot of sense.

A real estate professional can help you realize your dream and get you out of the rent trap. Talk to one now.

Val G. Abelgas is a real estate professional with Century 21 Excellence, based in Whittier, CA. He may be reached via e-mail at valabelgas@aol.com

Can you afford the home that you want?

So, you have finally found the courage to get out of the rent trap you are in, and have decided you want to buy a home for you and your family. But then you ask yourself: Can I afford the home I want? How much can I afford?

Before you even start looking for a home, you have to determine the price of a home you can afford, or how much monthly mortgage payments you can afford. A reputable real estate agent can help you determine if you qualify for a loan to purchase your dream home, and what price range you can afford to pay. Based on this determination, your real estate agent can help you find the house you want at a price you can afford.

It's better to ask your real estate agent or loan agent to pre-qualify you, or better yet have you pre-approved by the underwriter. Pre-qualifying is an unofficial, initial estimate of the size of mortgage you can afford. By being pre-qualified, you would be spared the trouble of looking at houses that you'll find out later you cannot afford. Pre-approval means the underwriter has examined all your documents, including your pay stubs, tax returns, net worth statements, bank accounts, monthly budget worksheets, etc. and certifies that you are qualified for a specific loan amount. It will help speed up processing of your loan application when you finally decide on a home you want.

There are many factors that determine a homebuyer's eligibility for a home loan or mortgage. Among these are total household income, net worth (total assets minus liabilities), credit record, and the value and condition of the property to be purchased.

The first two determine the homebuyer's ability to pay the mortgage. The lender will analyze the amount, source and stability of your income, as well as the amount of all your outstanding debts.

The third determines your willingness to repay debts. If a credit report shows a number of late payments or non-payments, maxed-out cards (meaning cards that were used to the allowable limit or beyond the maximum limit), or too much use of credit, the lender may determine that you are a credit risk and may not be willing to lend you money.

The fourth determines whether the amount of loan that a lender is willing to grant can be covered by the price of the property that will serve as security or collateral for the loan. This involves the appraisal of the property and checking if it has clean title.

The ability to repay will determine the amount of loan one can get from the lender. The lender will be willing to grant a higher mortgage to a borrower who has a high income and low debt, than somebody who has low income and high debt or one with high income and high debt.

Lenders use two ratios to determine the monthly mortgage payment a borrower can afford or qualify for. Both ratios relate to expenses as a percentage of income.

The more commonly used ratio provides for a comparison of anticipated monthly housing expense in relation to gross monthly income. Housing expense includes principal, interest, insurance and taxes. Gross monthly income is the total monthly income before any deductions for income tax.

Lenders often will not allow housing expense to go beyond 28 to 33 percent of the borrower's monthly gross income. If you are willing to make a down payment of from 5 to 10 percent, you will most probably qualify at the 28-percent ratio.

For example, if you earn $2,500 a month and your wife, who will be your co-borrower, earns $1,500 a month, your gross monthly household income will be $4,000. If you make a 5-percent down payment on the property, you would qualify for a 28-percent ratio. Multiplying $4,000 by 0.28, you would qualify for a monthly mortgage payment of $1,120. Based on the current interest rate for a 30-year term of 6.75 percent, you would qualify for a home loan of around $160,000. So roughly, the $4,000 income should be able to buy you a $170,000 home, provided you have money for at least 5-percent down payment plus closing costs, and a sound credit history, and the interest rates remain at 6.5 percent.

The bigger your down payment, the higher mortgage you'll qualify for and, naturally, the bigger the house you can buy. Or, the bigger your down payment is, the lower your monthly mortgage payments will be.

The other ratio the lenders use to qualify borrowers for a loan involves the comparison of the borrower's total monthly debts to gross monthly income. Lenders usually do not allow this ratio to exceed 33 to 38 percent. For example, if your household gross income is $4,000 and you have monthly debt bills totaling $1,000, you deduct $1,000 from $4,000, you will get $3,000, then multiply this by 0.33, and you will get $990, the amount you can afford to pay in monthly mortgage payments. Based on current rates, that would qualify you for a little more than $150,000 mortgage.

These, of course, are just estimates. Many factors can affect the final determination of the mortgage you may qualify for. They are just intended to help you estimate how much you can afford and how much mortgage the bank may be willing to grant you.

Before applying for a home loan, it is advisable that you first clean your credit record by paying off as many loans as you can afford, and close all unnecessary credit card accounts.

If you are a first-time homebuyer, you will most probably make a slightly higher monthly mortgage payment than your current monthly rent, the difference depending on the price of the home you plan to purchase and the down payment you are willing to make.

If you are currently paying $800 monthly rent, this means you will have to adjust your lifestyle to afford paying the additional $200 to $300 in monthly payments. You may have to eat out less, rent videos instead of watching at AMC cinemas, reduce spending on clothes and cosmetics, etc. Security, comfort, and freedom from renting have its price. But it's all worth it, because you are making a long-term investment for you and your family.

Val G. Abelgas is a real estate professional with Century 21 Excellence, based in Whittier, CA. He may be reached via e-mail at valabelgas@aol.com