Before Buying a Home
Things to Consider Before Buying a Home
For many people, buying a home is the single biggest investment they will make in a lifetime. The right time to buy is different for everyone. Before making a decision to buy a home, ask yourself the following questions.
Can You Qualify for a Mortgage?
Qualification is based on your debt-to-income ratio. This is the amount of debt you have as it compares to your income. This can be determined by adding up all your monthly debt payments and dividing that number by your gross monthly income.
For example, if a loan program uses a 28/36 qualifying ratio, it means the homebuyer is allowed to spend no more than 28% of his or her gross income on monthly mortgage payments and no more than 36% on total debt. Total debt includes car and school loans, credit cards, child support and alimony. More specifically, if an individual earns $60,000 per year, his or her monthly gross income is $5,000. Under the 28/36 guidelines, that person's maximum monthly mortgage payment should not exceed $1,400 while his or her total monthly debt should not exceed $1,800.
A high debt-to-income ratio can imply that there might be an issue making monthly mortgage payments. A number below 43% is generally considered adequate when qualifying for a mortgage.
How Much Home Can You Afford?
When you start the search for your new home, you'll save yourself a lot of time and frustration if you have a good idea of how much home you can afford. Putting pencil to paper, calculating the mortgage expenses and establishing a budget will give you a better idea of your specified price range.
Be sure to consider additional costs that might be involved above and beyond your monthly mortgage payment. In some instances, you'll encounter upfront and ongoing expenses.
Home Inspection costs: These cost can be anywhere from $200 to $900. The costs depend on the running rates in your area.
Down Payment: The down payment for homes usually ranges from 3% to 30% of the purchase price. Your monthly payments will be lower and you will acquire more equity in your home with a larger down payment. If your down payment is less than 20%, you will be required to have mortgage insurance.
Closing Costs: These are the expenses that fall above the price of the property which are incurred by buyers and sellers in the process of transferring ownership of a property. Closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. Typically, the cost of closing is about 2 to 7 percent of the mortgage amount. Closing costs will vary by property.
In addition to your monthly mortgage payment, as a homeowner you may incur the following potential expenses:
Homeowners Insurance (required)
Mortgage Insurance (if applicable)
Flood Insurance (if applicable)
After you've considered these factors and established a preliminary budget, the next best step you can take is to obtain a prequalification* letter from your Loan Officer. Armed with this, your search will have the strength that comes from financial backing, and you will have the freedom to enjoy looking for your new home.
How's Your Credit?
Your credit score is the most important number you need to know before starting the home-buying process. All lenders require a credit report that contains personal financial information such as loan payment information, bank and credit card accounts, and more. You are able to obtain a copy of yours by contacting any one of the credit bureaus throughout the United States.
*A prequalification is not an approval of credit, and does not signify that underwriting requirements have been met.