Smart Moves by Ellen James Martin

Tips for Prospective Buyers

A couple in their early 30s have been renting a house in a charming historical neighborhood for several years. They’d love to buy a place up the street. But they fear that if the economy slides, their jobs might be at risk.

Fred Meyer, a longtime real estate broker and consumer advocate, says the couple in this true story are typical millennials in their views on home buying. They’re finally ready to own, and imagine their wedding in the backyard of the place they hope to buy. Yet they still have vivid memories of family members who lost homes to foreclosure after the last housing downturn a decade ago.

Should this couple buy or just keep renting? Meyer encourages them to make a purchase, assuming they’re in good standing at their places of work.

“For most young adults with salaried positions who are ready to settle down, buying a home is a much better alternative than renting indefinitely. You’re probably sick of paying rent. But you don’t want to set your course based on some economic forecast that could be all wrong,” he says.

Through the years, Meyer says he’s heard from a number of friends and acquaintances whose excessive caution kept them from buying a place when real estate was more affordable.

Of course, there are some employment situations which don’t lend themselves to financial stability.

Here are a few pointers for prospective first-time home buyers:

-- Make a sober assessment of your job stability.

Victor Hess, a veteran financial planner affiliated with the National Association of Personal Financial Advisors (napfa.org), urges those planning to buy a first home to take into account their level of employment certainty before making any final decisions.

“Jobs aren’t permanent anymore, so it’s smart to play it safe with all major financial decisions, including buying a house,” Hess says.

Nor should government workers become overconfident about keeping their jobs, he says.

“Government jobs -- whether at the local, state or federal level -- are still somewhat more stable than are corporate jobs. However, due to our changing economy, you can expect more job cuts in this sector, too,” according to Hess.

Your overall income stability depends on the demand for your skills and how sharp you’ve kept those skills, he says.

Hess, who’s both a CPA and a financial planner, generally advises his home-buying clients to spend no more than one-third of their gross household income on mortgage payments. But he allows that this rule of thumb may not apply to those who have set aside the equivalent of at least six months' worth of income in their savings accounts.

“You need to build a financial cushion to protect you if a job you’re counting on is lost,” Hess says.

-- Don’t depend on a mortgage lender’s word as to what you can afford.

Many would-be homebuyers emerge from their lenders’ offices preapproved to borrow more than they’d expected.

But should you rely solely on your lenders’ advice when deciding how much you can afford for mortgage payments on a home? Absolutely not, Hess says.

“Since they work on commissions, mortgage lenders are motivated to push you to the highest borrowing limit they can,” Hess contends.

Also, lenders may not take into account outlays you face on a regular basis. Would your lender know, for instance, that you’ve pledged large annual donations to your church or synagogue? Probably not.

-- Look to a neutral adviser for planning help.

Financial planners and tax accountants are generally not in a position to judge your job stability. But many can provide perspective on the potential cash flow implications of your home-buying plans.

“We can’t give you any guarantees. But we can give you guidance and insights,” Hess says.

Before you set out to shop for a home, he suggests you talk over the matter with a trusted financial adviser who charges by the hour.

“I can’t imagine this taking more than two to three hours,” Hess says.

The financial adviser you choose should be able to calculate the tax benefits available to you through your mortgage interest deductions.

“It’s not uncommon for people to overestimate these benefits when they’re buying a home,” he says.

-- Be especially cautious if you’re moving to a new city.

Making a long-distance move for work reasons always comes with a degree of uncertainty. Will you like both the new area and the new job? And will the new employer want to keep you on?

Until some of these questions can be answered, Hess suggests you consider taking a rental unit for a few months rather than buying a home immediately. That way you reduce the risk that you’d have to resell the place quickly and at a possible loss.

“I’m a huge believer that homeownership is the right choice. Usually, renting doesn’t make financial sense. But when you’re relocating for a job -- and there’s some doubt that your new situation will work out -- you may want to wait for six months to a year before buying that fancy house,” he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)