It’s that time of year again; For Sale signs are flagging yards all across your city. Rates are in a great place for buying and there are many properties out there just waiting for the right owner.
As of 5/28/2015 per www.bankrate.com:
- 30 year fixed mortgage rate was 3.94%
- 15 year fixed at 3.05%
- 5/1 ARM was 3.05%
Have you been renting for a while and always wanted to be a homeowner, but are intimidated by the process? Making sure you are in the right position to be a homeowner is your first step in this process. Here are the main things to consider before talking to a lender, realtor, or starting to look for a home:
If you haven’t pulled your credit report and know what your scores are, this should be the first thing you do. Due to the downturn of the economy, guidelines for lending have changed. Lenders need you to have a credit score of at least 640 minimum on average (this varies depending on programs and/or lender guidelines). If you have collection accounts that aren’t medical, you should make sure these are paid off or that you’re in an agreed repayment plan that you can document. You can access your free credit reports (TransUnion www.transunion.com , Equifax www.equifax.com , Experian www.experian.com ) by visiting www.annualcreditreport.com or calling 1-877-322-8228. Your scores are not free with the reports, but you have the option to purchase them.
If you have never reviewed your credit reports, this can be like reading an ancient language. Apprisen offers a Credit Health Education Session where a Certified Consumer Credit Counselor pulls and reviews your credit reports and scores with you. You will be educated to understand the Fair Credit Reporting Act, your rights, and how scoring works, not to mention, be given a personalized plan to help you understand what you need to do for the purpose of becoming a homeowner. For more information click Chat or call 1-800-355-2227.
Debt to Income (DTI) Ratio:
This is where the lender will look at your monthly gross income, the loan amount you are asking for, and then determine what percentage of your gross income is the amount that the monthly mortgage payment would be. They prefer that your monthly mortgage payment on average is no more than 31%, this varies per lender. They will also see what other debts you owe, like credit cards, auto loans, student loans, etc. They add those payments to what the mortgage payment would be and see what percentage that is to your monthly gross income. They prefer no more than 45% on average, but this may vary also.
Let’s look at this closer…
If you make $36,000.00 a year, then your monthly gross income is $3,000.00. 31% of $3,000.00 is $930.00 (estimated maximum mortgage payment), 45% is $1,350.00 (estimated maximum mortgage payment plus other debt payments). Keep in mind; lenders go by gross income to determine your eligibility. But, to ensure you can afford your mortgage payment and avoid future hardships; I suggest you consider a payment that is closer to 31% of your net (bring home) monthly income. Just because you can get a larger loan, doesn’t mean you should. After all, your net income is the actual amount you will have to work with to pay your bills every month.
We have talked a little about income in the Debt To Income section but there are other things to consider. Paying “Rent” usually includes all or some of the following in your rent payment: electric, gas, water, garbage, cable, etc. If you’re paying $975.00 for rent, you’re probably thinking…this is more expensive than a mortgage payment; and, you may be right.
I suggest you complete a “dummy budget”. List a house payment of about $970.00 (which would be a good estimated payment PITI ( http://en.wikipedia.org/wiki/PITI ) if you were buying a home for $150,000.00, but include in your list of expenses $100.00 for gas, $100.00 for electric, $50.00 for water. And, now include all your other monthly expenses such as food, auto gas, auto insurance, cell phone, cable, home phone, internet, credit card payments, auto loan payment, student loan payment, etc. Subtract these expenses from your net monthly income. What do you have left? If you do not have enough for savings, what will you do when something breaks? You can’t call a landlord when you’re a homeowner. Savings needs to be another bill in your budget; it protects you and your home.
It is true, there are many loan types that will allow you to buy with No Money Down or programs that help with Down Payment Assistance (DAP). But no money down, isn’t exactly no money down. Let’s say you’re ready; you’re pre-approved with your lender, working with your realtor, and you find a house you placed an offer on; if they accept, you will need to put a good faith deposit down on the contract anywhere from $300.00 to $1,000.00. Then you will need to have inspections to make sure it is in the condition you want to buy, which is another $500.00 to $1,000.00 out of pocket. None of that comes out of the loan or down payment assistance.
Then, let’s say you close on your home and it is time to move. Moving your belongings costs money also. Expenses might include: truck rental or movers, paying to get utilities turned on at your new home, you may even have to pay new utility deposit amounts. You don’t want these costs to deplete your savings because you will likely need savings to fix up or paint the house, buy furniture, etc. The bottom line, start saving now, you want money left over for emergencies after you have covered the cost of buying the house and the moving expenses.
Now that you know what your targets need to be for you personally to be a homeowner, stay connected to ApprisenMoneyMinute.com (http://apprisenmoneyminute.com/ ) as we cover more homeownership topics this month.