When you look to buy a home for the first time, it can be a very stressful experience. But, with the right knowledge, you will find the process fairly simple and you will understand everything you need to know about home financing. Listed below are a few points that can ease your journey to buying your first home:
Your personal finances- this is the very first criteria that you must address before deciding to buy a house. You must determine whether you are qualified to apply for a mortgage loan. In the present economy, it is quite hard to get approved for a mortgage loan. If you’re more prepared to go through this process, it will enable you to qualify for more loan programs especially those which have more competitive and lower mortgage rates. Answer the listed questions before you go house hunting or to the bank for a loan:
- Have you had a solid work history over the past few years? If not, can your spouse/partner help you qualify?
- Are all your Tax Returns in order for the past 2-3 years? If not, you must take the help of an accountant as soon as possible
- How is your credit? If you have negative credit or no credit, you could qualify for a loan but with higher interest rates. To understand the status of your credit, obtain the most recent copy of your credit report from the Experian, Equifax, and TransUnion.
If you’re an American, you are entitled to free copies every 12 months and if you’re employed, if you collect public assistance, or if you were denied credit recently.
- What are your current debts? Your mortgage loan could be denied on the basis of “too much open credit” which means you have large credit balances, many open accounts, unpaid student or car loans, etc.
- What has your banking history been like? Make sure you clear any negative balances or overdrafts before you apply for a loan
- How much money can you put down? Although this is not a requirement in most cases, especially if you find low mortgage rates through programs like FHA and VA mortgages, putting down a maximum of 20% of your own money can help. If you put down your own money, you don’t have to pay Private Mortgage Insurance, an amount that can be added to the initial loan as well as as an extra monthly expense
- What other form of income do you have? If you have a low income, that is infrequent or compromised credit, you should make sure to mention additional forms of income such as dividends, alimony, child support, settlements, disability, etc.
Knowing the answers to these questions will greatly assist you when you work with a relator or lender and your process will be faster and smoother. An additional bonus is that you will have all your documents ready.
Once you’ve met the above criteria, your processes will start. First, the mortgage lender will calculate your Debt-to-Income Ratio which is the difference between your income and how much you owe in debt in credit cards, student loans, car loans, rent, and bank loans.
Calculating your Debt-to-Income Ratio:
- First, list your total monthly income. Include salary, commissions, disability, public assistance payments, alimony, child support, settlement payments, dividends and pensions.
- Next, list all the open debt you have. Do not include regular household expenses such as food, clothing, and child care unless these expenses are on your credit card
- In the third step, divide your total monthly debt by your total monthly income. Mortgage lenders prefer a ratio of 0.36 or lesser. Remember, the higher your ratio, the higher your interest rate, and the higher your mortgage payment. While lenders usually allow you to be a little over this ratio, you also need to make space for property taxes, homeowners insurance, and maybe Private Mortgage Insurance
- To figure out where your proposed mortgage loan will take you, multiply your total income by the 0.36 multiplier
- Finally, subtract your total debt from this 0.36 amount and find the difference. This new amount is what you should try to remain below for your mortgage payment. Depending on whether this amount is suitable for you, you can reduce it by paying off other debt first, increase your down payment, and the total mortgage loan amounts
Finally, fine tune your numbers:
Once you’re done with the above steps, you will have a rough estimate of what your maximum monthly debt and mortgage payments should be. You can fine tune your numbers once you know other loan parameters. But some of these parameters will only be revealed to you once you decide on a house. Other factors that should be considered are terms of the loan, the mortgage interest rate, property taxes, homeowners insurance, condo/homeowners association fees, and depending on the amount of your down payment, Private Mortgage Insuranc.