This information is located in our software for artists. Some references within the text will be software related.
 
Unfortunately, many creative professionals have internalized the artist as poverty myth, thinking that artists are destined to a life of destitution. Consequentially, many artists think they will never be able to buy their own house or studio.  In the meantime, these same artists live in fear of rent increases, deal with greedy landlords, or get priced out of apartments and lofts after they have invested their own time and money on renovations.  They constantly move from one neighborhood to another, trying to escape the next gentrification wave. If you feel powerless in a rental situation, you might want to consider saving to purchase your own home, condo or studio. Owning a home means you have equity, which helps with getting loans and building wealth in the future. When you rent your money is just going to a landlord, but when you own your house any investments you make to improve it help to increase your overall worth.
 
Buying one’s own place to live is tantamount to taking a stand against developers.  Finding an underutilized building, or house in need of repairs, rather than purchasing something newly remodeled, is also an eco-conscious way of dealing with one’s own housing.
 
If the idea of home ownership is overwhelming, consider consulting with a loan broker who can help you strategize for the future.  The following are preliminary considerations:
 
• Start a savings plan; create a reasonable monthly budget and stick to it.
 
• Figure out what you can afford.
 
• Consider asking your family for help.
 
• Talk with a lender about mortgage options; get a pre-approval.
 
• Begin actively looking for homes, especially ones that need work—they tend to be less expensive. The old adage is to buy the worst house in the best neighborhood on the best block. You can always make repairs.
 
About Loans

Most people—and most artists—do not have a lot of disposable income.  99% of home buyers borrow money to purchase their homes.  The important question to answer is how much money can you afford to borrow?
 
To determine this, a lender/bank will take a couple of things into consideration.  First, a lender will take a very close look at your financial situation, which basically means the money you make versus the money you owe on any outstanding debts, such as student loans, car payments, etc. Second, a lender will look at your credit rating, or FICO score (FICO is short for "Fair, Isaac and Company," which developed the mathematical formula used to calculate these scores). FICO scores range from 300 to 850 (higher than 660 is generally considered good). Your score will show a lender how much of a risk you carry as a borrower.
 
For instance, if you have repeatedly missed paying credit card bills, defaulted on prior loans, or filed for bankruptcy, these factors will give you a lower credit rating, making you a greater risk as a borrower (FICO scores equaling 620 or lower). By measuring your finances and credit rating, a lender will comfortably be able to provide you with an estimate of the home loan for which you are eligible. Generally speaking, if you have steady income and good credit, the amount is approximately 2-2.5 times your annual gross income.
 
Figuring Out Your Monthly Income

To figure out your monthly gross income (that is, your monthly income before taxes), begin by listing your total annual incomes from work, sales or commissions, interest and investments, child support, social security and any other income you receive.  Income from your artwork should be included.  In order to claim money as income, you must first have declared it to the IRS and paid taxes on it.  You cannot include any money under the table.  If you plan on buying the house with a spouse or partner, include their income as well.
 
Figuring Out Your Monthly Expenses

You also need to figure out your monthly expenses.  List all of your total monthly expenses, including your car, student and other loans, credit card debts, alimony or child support, storage, rent and utilities, etc.  If you are buying the house with a spouse or partner, make sure you include their expenses as well.  Here is an additional tip: if you have fewer than ten monthly payments left on any loan, you do not need to include it in your monthly expenses. (You may also want to choose to prepay a loan to get it below ten monthly payments so that you will not have to count it.)
 
Debt-to-Income Ratios

Before giving you a loan, a lender will compare your monthly gross income and monthly expenses to a ratio called the Debt-to-Income Ratio. The most common Debt-to-Income Ratio is 28/36. The first number (28) is called the housing expense ratio. It is the maximum percentage (28 percent) of your monthly income that you can spend on your monthly mortgage payment. The second number (36) is called the overall debt ratio. It is the maximum percentage (36 percent) of your monthly income that you can spend on all of your combined monthly debts, including your monthly mortgage payment.  Please keep in mind that the larger your down payment on a home, the less important the ratios are to lenders.
 
Affordability

Between the housing expense ratio and overall debt ratio, the lender will look at whichever is lower when pre-qualifying you for a loan. Please keep in mind that the two ratios only project what you can afford for a mortgage payment, but not what is referred to as PITI—a combination of principal, interest, taxes, and insurance expenses. The principal and interest (your monthly mortgage payment) will depend on the amount of money you borrow, the type of loan you select, and the interest rate. In addition to principal and interest, you will also be responsible for paying real estate tax and homeowner’s insurance. The amount of real estate tax will depend on where you live; the cost of homeowner’s insurance will be determined by the policy you choose. If you purchase a co-op apartment or condo, taxes, insurance, and, possibly, an association fee (the fee for upkeep of common areas) will be covered by a monthly maintenance fee, which you pay in addition to your monthly mortgage payment.
 
Getting Pre-Approval

Once you have completed the above calculations, you should feel pretty comfortable with your financial situation. You now need to take the process to the next level: getting a pre-approval from a lender for a loan. To be pre-approved, you will need to present the following information to a lender: your social security number, home address for the past three years, employment history and salary/income, current monthly expenses, and bank account balances. During the pre-approval process, the lender will verify your information and check your credit. Banks also prefer a recent history of full-time employment, as this indicates a reliable source of income. This is part of what makes purchasing a home difficult for artists, since they sometimes work part-time, or freelance, or cobble together different forms of employment in order to have the free time necessary to create art. Nevertheless, if all goes well, the lender will give you a letter stating that you have been pre-approved for a loan to be applied to the purchase of a home. The letter is usually good for a period of 60 days. The pre-approval process is free and having a pre-approval will make your bid much more appealing to a seller.
 
Down Payments and Closing Costs

There are two major expenses involved in closing on a home: the down payment and the closing costs. Lenders generally expect you to pay at least 20% of the sales price, up front, as a down payment. However, depending on a variety of factors, the amount of up front money can be as little as 3%-10%. Please keep in mind that if you pay anything less than 20% up front, a lender may require you to pay what is called Private Mortgage Insurance (PMI), which protects the lender in the event that you default on the loan. PMI can add anywhere from .25%-.75% to your monthly interest rate payments, but sometimes this is the only way to get a place of your own. Another way to avoid paying PMI is to ask your family for help with the down payment. If you choose this route, the money they give you must be a cash gift (not to be repaid—otherwise, it is another financial obligation that a bank would want to take into account), which they should commit to in writing. You should also plan on having additional money set aside for the closing costs, which generally amounts to 3%-6% of the sales price. Closing costs include things like appraisal fees, inspection fees, credit reports, insurance, PMI, taxes, attorney ‘s fees, accountant’s fees, escrow fees, title policy, bank processing, recording fees, etc.
 
In Summary

You must plan and do research in order to make your dream of owning a home a reality. Ask homeowners about their experience buying a home, taking out loans, etc. Consider working with an arts accountant to guide you through the process of how to save for a down payment, or get a pre-approval.
 
My partner and I thought it would be forever before we could afford to buy a house, primarily because we did not seem to be able to save for a down payment.  One of our friends, who was quasi-employed and had IRS tax trouble, got approved for a loan to buy a house, and we were shocked.  We figured that if he could get a loan, then we should definitely look into it.  We did not have a down payment, but took out two mortgages, one for the down payment and one for the home loan.  The interest on the down payment loan was high, but we made the payments for the required three years before penalty, and then consolidated the loans.  It was more expensive to do this, but it allowed us greater stability with respect to housing and studio space.