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Before You Look at Your First House
Experienced home buyers know that one of the first-steps in beginning a successful search for a new house is taking a hard, objective look at finances. Determining how much money you can dedicate to the purchase of your new house affects almost every aspect of buying a new home - including how we write the offer, which mortgage programs you will qualify for, shopping for the best mortgage loan and which homes are truly in your price range.
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Here are the questions that each home buyer should ask:
- How much cash is available for a down payment? The amount you have available for a down payment will affect what types of loans for which you can qualify. No cash is required in some types of financing, but the more you have available, the more financing options you have available to you. Learn more.
- Am I ready to write a check for the earnest money? Earnest money is a cash deposit made to a home seller to secure an offer to buy the property. This amount is often forfeited if the buyer decides to withdraw his offer. The amount of the earnest deposit will ultimately be determined by the Seller, however local custom will often be in the range of $1,000 or more on larger properties. We once took an old used tennis shoe as an earnest deposit and the sale closed successfully, so if lack of a down payment is a problem, talk to us.
- How much additional cash will be available to pay for closing costs? There are certain standard costs associated with closing the sale of a house. These fees are split between the buyer and the seller, as spelled out in the sales contract. Learn more.
- What is the maximum monthly mortgage payment that I can afford? Most lenders will use the 28/36 rule to determine the maximum mortgage payment you can afford. Some loan programs go substantially higher, up to 41% or possibly even 50% if all other factors are favorable.
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The 28/36 Rule
No more than 28% of your gross income can be applied to your mortgage, real estate taxes and insurance. And no more than 36% of your gross income can be applied to your mortgage expenses plus your regular debt expenses (car payments, credit cards, other student loans, etc., but not your current rent or utilities.) Other loan programs will permit higher ratios as mentioned above, however these are generally good guidelines.
To determine how much loan you will qualify for, calculate the 28% and 36% of your gross monthly income, (that is, before they take out taxes, insurance or other deductions).
Add up the total of your other debts (that is, any payments that you make on a regular basis and have 3 or more payments to go, not counting utilities or telephone, etc.)
Subtract your total debts from the 36% figure to determine what is left over for your mortgage payments.
For example and to keep it simple, say your income is $1,000 per month, the 28% and 36% would be $280 and $360 respectively. Assume that you had no other debts, the full $280 (28%) can be used for the mortgage.
However, if you had, say, $200 of other debts. Subtract that from the $360 (36%) $360 less $200 = $160. Therefore, only $160 is available for use for the mortgage.
This can seem confusing at first, don't worry, we will explain it in terms that you can understand. The main thing is that your total can not go much over the 36% figure.
If you are thinking about buying a house
and a new vehicle. Read This FIRST!
A monthly car, truck or SUV payment can greatly reduce your ability to qualify for a home loan. On the other hand, your ability to get a loan for the vehicle will generally Not be affected by your house payments. If you are thinking of buying Both, please WAIT for the vehicle until after closing on your new home.
Don't allow anyone (other than your Lender) to even pull a credit report on you or your spouse or friend. If anyone at an auto dealership asks for your social security number, chances are good that they might pull your credit report. Don't give it to them until after closing. The reason is that inquiries on your credit report can negatively affect your credit score and in some cases, adding a new vehicle payment could make it totally impossible for you to qualify for a new home loan.
If you have any questions or are thinking about a new vehicle, please visit with us first.
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