How Much in Payments Can Single Person Afford in Buying a House?

QUESTION: I am single, earning about $36,000 per year, and want to buy a house. But I’m confused as to how large a house I can buy. I have almost $10,000 in savings, and my mother will help me with an additional down payment if necessary. I would like to buy a modest house. How large a house can I afford?

ANSWER: You ask a very difficult question to which there is no exact answer. Each mortgage lender has different loan qualification rules. The toughest lenders who sell their loans to Freddie Mac and Fannie Mae have fixed, arbitrary rules.

These lenders only approve mortgages that take up to 28% of gross family income. But the most flexible portfolio lenders approve loans requiring payments up to 40% or more of income.

As a general rule, with a typical down payment you can afford to buy a home priced up to three times your annual gross income. Depending on your credit history, income and the loan interest rate, you should easily be able to obtain a mortgage requiring up to 33%, or more of your income for payments.

My suggestion is to first start shopping for a mortgage, then look at houses. Most reputable mortgage lenders will give you a firm, written loan commitment valid for up to 45 days so you’ll know what maximum mortgage you can get and how much down payment will be required, subject only to appraisal of the home you decide to buy.

How Could Appraiser Have Been So Wrong?

Q: Before we put our home up for sale, my husband insisted that we have a professional appraisal made. After we did that, as you often suggest, we interviewed several local realty agents about listing our home for sale.

We didn’t tell the realty agents about the appraisal.

But the agents estimated our home was worth from about $7,000 to $12,000 more than the appraisal. After checking each agent’s references, we gave one of the agents a 60-day listing. In late September, the house sold for close to the full asking price.

While we were very pleased with the professionalism of the realty agents, we feel the $250 we paid for the appraisal was a total waste of money. Not only was the appraisal almost $10,000 below our home’s actual selling price, but we learned later the appraiser used sales prices of other nearby houses to value our home but they really weren’t as nice as ours.

When we asked for a refund of our $250, the appraiser was very rude. I told the banker who recommended him to us and he said that appraiser had been coming in very low on appraisals recently. How can an appraiser be so wrong?

A: Until a sale takes place, a professional appraiser can only make an educated guess as to a property’s market value. Appraisers rarely are criticized for making low appraisals but high appraisals often lead to trouble if buyers, sellers and lenders rely on too-optimistic valuations.

Appraisal is an art, not a science. Even experienced appraisers make mistakes. To help improve the quality of appraisals, a new federal law requires each state to create new appraisal licensing standards within two years.

If the states fail to do so, the federal government will create national appraisal qualifications. In my opinion, this is a long overdue reform to clean up the appraisal industry, which is far too easy to enter.

Hopefully, when the new licensing standards are implemented within a few years, the quality of appraisals will greatly increase.

Agent Usually Not Liable for Opinions

Q: We bought our home in a new subdivision about two years ago. The realty agent showed us where a new nearby shopping center, schools and parks were planned. She also said we would be in a growing area where the values of homes were sure to increase at least 10% per year.

But none of that happened. The only “shopping center� built so far consists of a convenience store and a gas station. We have to drive about 10 miles to a supermarket. The schools and parks haven’t materialized either. As a result, I doubt we could sell our home for the price we paid. Do you think we should sue the realty agent for misrepresentation?

A: You can’t blame the realty agent for the lack of construction on the planned shopping center, schools and parks. As for the agent’s statement that the area was growing and homes would appreciate 10% annually in market value, that was probably an opinion rather than a factual statement. Unless the realty agent promised the events would happen, the opinion statements made don’t create liability.

Seller Need Not OK Finance Plan Change

Q: A major reason we are selling our home is to take a small down payment and then carry back a first mortgage to provide retirement income. Our realty agent had no trouble finding a buyer who offered us close to our full asking price and we agreed to take back a mortgage.

But after about two weeks the buyers said they had changed their minds and want to get a VA mortgage, which requires nothing down. This will foul up our retirement income plans. The real estate agent says we must agree to the change. Must we?

A: Of course not. When you listed your home for sale, I presume you stated in the listing that you wanted a small down payment and would carry back a mortgage for the balance of the sales price. After you accepted the first offer, you were under no obligation to agree to the requested VA mortgage change in sales terms.

Your buyers are obligated to complete the purchase as agreed and will be liable to you for any breach of contract damages if they don’t close the sale on schedule. Please consult a real estate attorney for full details.

No House Is Perfect, So Quit Complaining

Q: Almost six months ago, we bought our first home. The seller told us about a few defects, such as sluggish drains and a neighbor’s barking dog. But about a month after we moved in we noticed leaks around the skylight in the kitchen.

It turns out the skylight was installed improperly and there is dry rot around the roof flashing. The cost of repair will be about $450. Another problem is the dishwasher is worn out and will cost over $350 to replace. Do you think we should ask for our money back?

A: No. Quit complaining. No home is perfect, even brand-new ones. The defects you listed are insignificant. I’m sure you were disappointed, but consider yourself very fortunate that nothing major is wrong with the home you purchased.

Check References of Cut-Rate Realty Agent

Q: A local real estate broker advertises he will sell any home for a 4% sales commission, including listing it in the local multiple listing service and paying a 3% sales commission to the cooperating broker. As a former realty salesman, I don’t see how this agent can do it. We are getting ready to sell our home. Do you think we should list with this agent?

A: Before listing your home for sale with any real estate agent, ask for at least three names of their recent home sellers. Phone those people to ask, “Were you in any way unhappy with the agent’s service and would you list your home for sale again with the same agent?� If you are still in doubt but you like the sales commission saving, try a 30-day listing with that cut-rate agent.

Equity-Sharing Owner Must Be on Title

Q: My husband and I have about $75,000 total annual income but we only have around $5,500 in our savings account. We attended a lecture by a local realty agent who is trying to drum up sales by offering an equity-sharing plan. She says we can lease the house for three years and if we make all our payments on time, then we would go on the title. However, she was rather vague about our income tax deductions. Please clarify.

A: Internal Revenue Code 280A says equity-sharing co-owners must all be on the title to qualify for the income tax deductions for mortgage interest and property taxes. In addition, the investor non-resident can depreciate his portion of the house. The realty agent’s lease-option plan won’t entitle you to any income tax deductions during the three years while you lease the house but are not on the title.

Business in Home Is Tax-Deductible

Q: I am considering starting a newsletter publishing business from my home. Recently I retired and I feel there is a need for a newsletter in my field. As I would be operating this business from my home, what tax considerations are involved in deducting my home office expenses?

A: To qualify for tax deductions you must have an “exclusive business area.� It can be part or all of a room. But it must be a special area that is not used for other purposes.

For example, suppose you use 500 square feet of your 2,000-square-foot home for your newsletter business. That means 25% of your home mortgage interest, property taxes, fire insurance, utilities and maintenance costs will become tax-deductible as business expenses.

In addition, all directly applicable expenses, such as a business telephone line, are tax-deductible. Operating from your home is an excellent way to start your business. But be sure to document all your expenses because the IRS loves to audit home-operated businesses.

Retirees Should Not Pay All Cash for Home

Q: We recently sold our home for what I consider an obscene price. As a result, we are “flush with cash.� Thanks to your expert advice, we used that $125,000 “old folks� tax exemption. But we plan to buy a modest retirement home.

Our question revolves around paying cash or getting a mortgage on the house we buy. My husband thinks we should pay all cash, but I think we should make a small down payment and keep the rest of our cash in CDs or other investments. What do you think?

A: Insist that your husband follow your sound advice. Buying your retirement home for cash could be a very bad mistake, especially if you need cash for an emergency or investment opportunity. Although you are retired, that doesn’t mean you shouldn’t have a mortgage on your home.

If you make the mistake of paying cash for your retirement home, in addition to sacrificing liquidity, you will be tying up your cash and making a very minimal yield on it.

Even retirees should make a small cash down payments and obtain the maximum mortgage available. For example, I had to twist my elderly parents’ arms to make a 10% down payment and obtain a 90% mortgage when they bought their condo several years ago.

They thought it was outrageous to pay 9% interest. Since then, the $45,000 profit on their $3,500 down payment is over 1,200% if my math is correct. I hope you get the point of making the smallest possible down payment when buying any residence, especially a retirement home.

Can’t Trade Stock for Home and Avoid Tax

Q: I recently got married and want to buy my new wife a home. But the problem is we don’t have much cash for a down payment. However, I do have some common stocks which I could trade for the down payment. But the problem is that I have about $25,000 profit in the stock. I’ve heard about tax-deferred real estate exchanges. How can I trade my stock as a down payment on a home without paying tax on the profit?

A: Sorry, a profitable exchange of common stock for real estate would be a taxable event because it will be a trade of “unlike kind� property, namely personal property, for real property.

A tax-deferred IRC 1031 exchange refers to a trade of one “like kind� property, such as an apartment building, for another such property without receiving any taxable unlike kind property such as cash or net mortgage relief.

Sell Old Home Before Purchasing a New One

Q: We are thinking of buying a larger home but have not yet found one we want to buy. But we are afraid to put our current residence on the market until we find one to buy. How can we best solve this “Catch-22� situation?

A: If you are certain you want to buy another home, sell your old home first. Then you won’t be under pressure to sell quickly and accept a less than ideal purchase offer.

However, keep looking for a house to buy. If you find one you want to buy before you sell your present home, you can make a purchase offer with a contingency clause for the sale of your old home. But don’t be surprised if the seller rejects your offer or insists it include a release clause so if a better offer comes along, the seller can insist you then either remove the contingency or cancel the purchase.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent him at P.O. Box 280038, San Francisco 94128.