Take These Steps Before You Buy a Home
So you’re thinking of buying a home—congratulations! Between mortgage payment calculators, reality agreements, and FICO scores, there is a host of information to process as you make your home ownership dreams a reality. Pre-qualifying and understanding the process before getting a mortgage will give you a leg up on the competition, when it comes time to buy a home.
Buying a house is an exciting and nerve-wracking time, but these 3 tips will take the mystery out of the mortgage process.
1. Know Your Finances Before You Apply for a Mortgage
Before you jump into a mortgage, you need to be aware of your own finances and how they stack up against the requirements. There are three numbers that potential home buyers should know: their credit scores, debt-to-income ratio, and down payment amounts.
The minimum credit score typically needed for a mortgage varies per lender and state. Typically, mortgage lenders will often see borrowers with credit scores under 700 as riskier applicants. You can raise your credit score over time by making timely payments, keeping your credit utilization low, and paying off debt.
Debt-to-Income (DTI) Ratio
Mortgage lenders want to make sure that you make enough money to repay your mortgage. This ratio divides your total debt to your income. A DTI ratio of 36% usually the maximum allowed for borrowers for the total debt payment, divided by income. The mortgage payment should be no more than 28% of your income. so that leaves 12/5 of your income for other debt payments. Those who hope to secure a mortgage, will be more qualified with a lower DTI.
To calculate your DTI, add up all your monthly debt payments. For example: $500 (auto loan) + $100 (student loans) + $100 (credit card minimum) = $700.
Then, divide that number by your gross monthly income. If you make $4,000 per month, your DTI calculations would look like this: 700/4000=.18.
Lenders prefer to see a debt-to-income ratio smaller than 36%, with no more than 28% of that debt going towards servicing yourmortgage. To qualify for a mortgage, you can project a complete $1,440 debt payment per month, in order to qualify for a mortgage.
With a current $700 debt payment, that leaves $740 for a mortgage payment.
In this case, it would be best to pay off some debt, before considering buying a home. This will make you more prepared to take on a mortgage.
As a side note, some lenders will accept a DTI up to 43%.
We rarely recommend taking on more debt than is comfortable for you. You want to avoid a situation where a financial setback, like a job loss, will put you at risk of losing your home.
2. Learn How Much Cash You’ll Need for a Down Payment
When buying a home, the purchase price is made up of a down payment, which is a cash payment to the seller plus a home mortgage. The mortgage is the loan to acquire to finance the remainder of the home purchase.
For a conventional mortgage, lenders typically prefer a 20% down payment, although varies per geographic region. Putting down 20% means that you won’t pay Private Mortgage Insurance (PMI), which will reduce your overall mortgage payment.
Home prices vary widely, depending upon where you live.
According to Kiplinger, these are the most affordable places to live in the US:
- McAllen, Texas
- Harlingen, Texas
- Kalamazoo, Michigan
- Joplin, Missouri
- Amarillo, Texas
- Memphis, Tennessee
- Conway, Arkansas
- Fayetteville, Arkansas
In Texas the average cost of a home is $177, 000 according to Kiplinger.
In Michigan, the average cost of a home is $192,000.
While, the most expensive cities in the country are explosive.
In San Fransisco, the median home price is $1,300,000 and a 5% down payment is $65,000.
In Bethesda Maryland, the median listing price is $1,200,000 with a 5% down payment of $60,000.
You might also try speaking to a mortgage lender to determine whether you qualify for an FHA loan or another loan type that allows you to make a down payment of as little as 3%.
Use a Mortgage Calculator to Figure out How Much Home you can Afford
In addition to making sure you have an adequate down payment and a healthy credit score, it’s essential to examine your budget before you buy a house.
A good starting place is look at a mortgage payment calculator. This Texas mortgage payment calculators available online, is helpful regardless of where ou live. Make sure that the inputs are correct, so that you can accurately estimate your monthly payment. And don’t forget about checking property tax rates, private mortgage insurance if necessary, and any home owners association fees. You’ll also need to be prepared to pay for homeowners fees.
We also recommend that you keep a “repairs” fund of 5 to 10% of your annual mortgage payment. Unlike apartment living, when you own your home, when a pipe breaks, or your roof needs a repair, you must pay.
While your mortgage lender will give you an official breakdown of your payments when you take out a mortgage, it is always a good plan to calculate how much home you can afford before you start searching.
3. Get Pre-Approved for a Mortgage
It is best to get pre-approved for a mortgage before putting an offer on a home. Sellers will be more attracted to buyers who can demonstrate their credit worthiness and financial commitment to purchasing a home, and buyers with mortgage pre-approval can feel more confident in their offers.
Finding a trusted mortgage lender at this stage is crucial. While there are many self-service mortgage companies available online, working with a mortgage professional in person can facilitate the process from pre-approved to full approval, and can be improve the purchasing process.
Work with a Mortgage Professional
Real estate websites make it easy for would-be home buyers to contact the listing agent for any property and set up a showing. However, you should choose your real estate agent as carefully as you choose your mortgage lender!
When you start looking to buy a house, you should also look closely at local real estate agents and pick someone with a good reputation. Just like choosing a mortgage lender, you want to go with someone who will look out for your best interests in this process.
A reputable mortgage broker has access to mortgages from a variety of firms. Your real estate agent is typically knowledgable about the most trustworthy mortgage brokers.
Do Your Due Diligence
In most states, home sellers must fill out a Seller’s Disclosure Notice in addition to many other forms. This disclosure notice informs potential buyers about any problems with the home that the current homeowner is aware of.
While legally this disclosure must be completely honest and transparent, before buying a house, it is a good idea to hire a private home inspector. Homeowners may not be aware of an upcoming problem or could have forgotten to list something on the disclosure form. A home inspection is one of the best ways to protect yourself.
What You Should Know Before Buying a House – Wrap up
We can’t emphasize enough the benefits of knowing your financial situation before jumping into a mortgage. Consulting a mortgage calculator and being aware of key financial details (your credit score, DTI, and budget) will help with the pre-approval process.
The next step of the process is finding a trusted mortgage professional to help you move through the pre-approval documents, provide accurate mortgage payment calculations, and process the paperwork to secure your mortgage.
Once you find your dream home, it’s important to make sure that you protect yourself by reading the seller’s disclosure notice carefully and hiring a private inspector. Huge issues, such as a faulty septic system or a leaking roof, can be cause to walk away from a purchase or can give you room to negotiate the price of the home.
Real estate and mortgage professionals are here to help you, but you should always do your research before buying a house. If you ever doubt that your real estate agent or mortgage professional has your best interests in mind, reevaluate the situation.
Purchasing a home is a life-changing decision, one you should make with careful planning and trusted professionals by your side.
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