The process of buying a home can be overwhelming, intimidating, and yes, stressful.
Planning and preparing before you even begin to search for homes online are major keys to a successful home buying experience.
Before you download home search apps, talk to a mortgage lender, and attend open houses, It's important to self-evaluate your current lifestyle and financial situation.
Here are some questions to get you started:
What stage of life are you in?
Do you move a lot?
Do you enjoy traveling multiple times a year?
Is employment stable?
Are you financially and emotionally stable?
Calculate a Monthly Payment
Calculate a monthly housing payment you are comfortable making. Notice I didn't say "can afford".
A lender (bank or mortgage broker) will consider your annual income and debts to find the largest monthly mortgage payment you could make without raising your total debt-to-income (DTI) ratio past allowable maximums, which most conventional loans enforce at 45%.
Once the lender determines your maximum mortgage payment, it factors current mortgage rates to determine your loan size and maximum purchase price.
You may or may not be comfortable with the maximum mortgage payment determined by the lender. That's why it's important to define what a "comfortable monthly housing payment" is to you early on.
Lenders will tell you what you could pay for a home. Only you can determine what you should pay.
A common rule for mortgage affordability is to spend no more than 28% of your gross monthly income on housing payments. Housing payments include:
- Loan principal and interest
- Property taxes
- Homeowners' association dues (if applicable)
- Private mortgage insurance aka PMI (if applicable)
This is commonly referred to as the front-end ratio. Lenders prefer to see a front-end DTI of 28% or less.
Your total DTI ratio, commonly referred to as the back-end ratio, accounts for all your monthly obligations including:
- Monthly housing payments (consisting of all the items outlined above)
- Monthly minimum credit cards payment
- Monthly child support or alimony
- Monthly auto payments
- Monthly payments to installment loans
Lenders prefer to see a back-end DTI of 36% or less. However, that can be exceeded up to 45% if the borrower meets certain credit score and reserve requirements.
Improve Your Mortgage Approval Chances
Conserve it. You will need to show cash reserves in a bank or investment account.
Avoid making out-of-the norm deposits while you're shopping for a home or are under contract to purchase a home before consulting with your lender first.
Thinking about quitting your job and chasing your entrepreneurial dreams? Don't.
Mortgage lender underwriters like to see a stable job history. It's best to hold off on your entrepreneurial dreams and stay in that job you love until you've purchased a home.
Check your credit report online and correct any errors.
Pay your bills on time.
Do NOT make unnecessary purchases and add new debt or make changes to your credit profile without consulting with your lender first.
Finalize any lawsuits, divorce proceedings, and paternity suits way in advance of buying a home.
Benefits of Buying a Home
The benefits of buying a home are as much psychological as they are mathematical.
According to Christopher Mayer, a professor of real estate finance, "the value of a home is the value you get from living in it and two different people are going to get two different values from the same home. It's an individual decision."
That said, there are some benefits of owning a home vs renting.
Pride of Ownership
You can do things like paint the walls, add fixtures, change the flooring, plant a vegetable garden, and let the dog roam freely.
Rent historically increases over time. A fixed-rate mortgage locks in monthly payment for 15, 20, or 30 years.
You can stay in your home for as long as you want. You'll never get the dreaded phone call from the landlord saying, "I want my house back!".
Monthly mortgage payments slowly increase the amount of equity you build in your home.
Over the past 50 years (except for some rough years in the late 2000's), home values have consistently appreciated at a rate higher than the rate of inflation.
Ask anyone who bought their home in 2010 and 2011 how they feel about their home's appreciation over the last six to seven years.
You can deduct expenses on your federal income taxes. Property taxes, prepaid interest paid at closing, points charged to your loan, mortgage interest (the largest portion of your payment for many years), and mortgage insurance are all usually deductible.
Capital Gain Exclusion
Under today's tax laws, you are exempt from paying taxes on a large portion of the appreciation when you sell your owner-occupied home.
Don't take our word for it, though. Ask your accountant about this.
Ready to move out or up?
Contact us today.
Let's talk about your goals and how we can help you devise a plan to achieve them. No gimmicks. No pressure. Just professional advice based on experience and market expertise.