This post is for those who haven’t experienced buying their first home, but also may be of use and additional help for those old timers. Buying a home is only one important step, but is one of great importance. Getting it right is crucial.
Are you really ready for buying a home? The next question might be; should you rent versus buy? There are some question you must ask yourself to know which path to take but I will give you some pointers for knowing if you are ready for buying a home. Some important questions you should consider before buying a home:
- Do you have good credit? Do you have recent late payments (1×30, 2×30 etc. days late)? Do you have lots of late payments? Do you have a lot of debt? How much debt you have matters and will affect the approval process if you have too much.
- When you take your income divided by your debt; is the ratio above 41%. Please note that the automated underwriting systems which we call Desk Top Underwriter (DU, Fannie Mae, and Loan Prospector (LP, Freddie Mac) will take what we refer to as debt to income ratio over and above 41%, when your credit is in an excellent status. It also depends upon your total financial profile; the loan to value of the mortgage loan, and the entire loan file. In other words your income is $3000/mo. Your total debt including a new house payment is $1300. Your debt to income ratio would be 43%. That is with an $800 housing payment, and your taxes and insurance would be added into that amount, and your other debt is $500 a month. If you think about this, a car payment alone will amount to almost that amount if you have a newer car.
- Do you have money saved to take care of needed loan expenses such as closing cost and prepaid items, and reserves? The more savings you have the better your loan status will be (if all other loan criteria is also in line). Normally on Conventional loans you need approximately 5%, with a loan to value of 95%. You may now obtain a gift to help in paying these cost and the seller can pay no more than 3%. Note: So you might ask why do you need savings? It is never a wise choice to buy a home without having some money in the bank to at least pay your prepaid items, and have the first two (2) months payment saved. This is why so many individuals get into trouble in the first few months of their loan. They were not wise in preparing for their new home. Don’t let that happen to you. If you cannot save money before you buy a home, you will not be able to save money after buying a home. That is why so many have to refinance their home.
- Is your income stable and ongoing? Meaning does your income fluctuate (commission/tips/etc) or are you on a salary? You should take this into consideration when buying a home. The house payment is not going to change if you have a fixed rate loan, and at this present time you would actually be nuts if you did not get a fixed rate mortgage loan. Mortgage loan rates have been fairly steady with a range @ 4.000% for FHA financing, and for conventional financing. For a $200000 home a payment for 30 years @ 4.000% would be $954.83. (See payment calculator) That does not include taxes and insurance if you escrow. Rates are only estimated and the APR will vary.
Those are the four major areas to be considered when you contemplate buying a home. The analysis does not stop there though. You must remember that life things do not stop there. You will have certain expenses which do not go away just because you have bought a new home. You will have everyday expenses of groceries, medical, utilities, childcare (if applicable), car insurance, life insurance, dog food, and any other miscellaneous item. ALL OF THESE count in the process of knowing when you are ready to buy a home. Before you sign; Read the fine print:
A lot of people forget about the above mentioned items as these items ARE NOT added into the debt to income ratio. Don’t fool yourself into thinking that just because the lender does not consider these that they do not count. They count very heavily. Childcare can be quite expensive. Car insurance is also expensive, and you need life insurance to take care of the family if something happens out of the ordinary. The cute little doggy has to be fed, you must buy gasoline (very expensive now) to get to the job, and you get hungry at least three times a day. You might also like to go out to eat occasionally.
I hate to sound gloomy about these known facts, but they are mortgage loan facts that you do not need to brush off when preparing to buy a home. In other words, figure your income. Add up your installment loan debt, your revolving debt, and any other payments you have each month. Including your food, insurances, childcare, gasoline expense and any other miscellaneous expense. Then add the approximate new housing payment, including taxes and insurance; (you can get estimates per state on line). If you buy a condo, or PUD you may have a homeowners association fee (HOA).
If you have included all of this other expense and have money left over for reserves each month, then you are ready to proceed with buying a home. If not, you may need to think about putting yourself in a better position by getting rid of debt and learning to live more conservatively before buying a home.