Look for me next October on the Washington Mall – I’ll be the bridesmaid wearing a burnt orange taffeta bridesmaid dress.
When I asked my old college friend, Anne, what she and her hubby-to-be wanted for a wedding present, she had an unusual answer: a check. Turns out, Anne and Matt are saving up for their first home together; unfortunately, they’re doing it in one of the country’s most expensive housing markets. Since they’ve been out of their parents’ homes for the better part of two decades, they don’t need Egyptian cotton bath towels, white wine glasses, or a Cuisinart blender – they just want cold hard cash to go to their down payment.
Qualifying For A Mortgage
Today’s housing market has made it far more difficult for individuals, families and first home buyers to buy property. Lenders have tightened their restrictions, particularly their debt-to-income, or DTI, ratio requirements. While some lenders still grant financing to prospective homebuyers with a DTI of 41 percent, most have reined in that ratio to a strict 38 percent.
The good news? If your gross income put you on the bubble for financing as a singleton, your odds of qualifying for a mortgage should improve when you and your spouse jointly apply for a loan… that is, if your spouse-to-be is employed. And, even if your partner does work, if they brought a large amount of debt – car loans, student loans, personal loans, etc. – into the relationship, they could actually increase your DTI, making it more difficult for you to qualify for the lowest mortgage rates.
Navigating Home Loan Rates
The 30-year fixed mortgage is the most common loan out there, but it’s far from the only option. This type of loan is ideal if you want a stable loan with low monthly payments and a low interest rate. But many newlyweds aren’t ready to settle down into their “forever” home.
Case in point: my friend Serena. Serena and her husband bought a house before they were even engaged. Side note: I consider this to be a financial no-no. Jointly owning property with a non-spouse not only complicates your taxes, but it can also lead to an incredibly messy break-up (a la Jennifer Aniston and Vince Vaughn in the aptly named movie, “The Break-Up”) should you fail to make it down the aisle. Anyway, not six months after tying the knot – and less than 18 months into home ownership – Serena’s job transferred her across the country. Because they hadn’t been in their home the requisite two years, they had to pay capital gains taxes on the profit of their home’s sale.
If you think the chances of remaining in your love nest long-term are unlikely, you could opt for an adjustable-rate mortgage – or ARM – instead. ARMs come in all shapes and sizes. They’re typified by an ultra-low introductory rate, typically well below even the lowest fixed mortgages. After that introductory period, the interest rate is readjusted, usually on a yearly basis. The introductory period on ARMs range from three years (this is a 3/1 ARM) up to ten years (10/1 ARMs) or even higher. If you know you’ll be moving within five years, a 5/1 ARM can help reduce your monthly payment while still giving you the benefits of home ownership.
Living Within Your Means
One of the most trying parts of being a newlywed is adjusting from an “I” to a “we” mentality. My husband and I learned this tough lesson firsthand after saying our vows nearly seven years ago. At the time, we were both college students and (property) virgins. The rental market in the small, upstate New York town where we lived was slim pickings, so we hoped to buy a home instead. But one look at a home loan calculator told us what our bank account should have: our finances weren’t up to snuff.
Of course, this was 2004 – back when subprime loans and predatory lenders proliferated – and the bank’s mortgage calculator was far kinder than our own gut instincts. We worked with a Realtor, found a property we adored, and put in an offer. Ultimately, we ended up in a bidding war. It was only then that we really looked at the numbers, and realized that buying a house together – before we’d really mastered living together – would be a both a financial and a marital folly. We walked away from the house, and instead focused on saving up enough money for a real down payment.
This is a guest post written by Betsy Falwell.