Buying your firs home can be an exciting yet quite stressful endeavor. There are so many questions to ask and so many different aspects to buying a home that it can be a bit intimidating at times. Fortunately, with a home buyer checklist, you can be better prepared and know what to expect when you start the home buying process. When it is your first time buying a home, it can raise a lot of questions and there are several things you should know in advance so the process goes smoothly. Think about the following steps as you go through your home purchasing adventure, and you’ll be prepared and feel comfortable that you are getting the best home for your money, with a lot less worry.
What are you able to qualify for?
Before you can buy a home, you must first determine how much house you can afford. This is undoubtedly the most important factor when looking for a home, because it determines what type of home you can buy as well as the location and how much you can get a mortgage for. Most lenders look at something called your debt to income ratio to determine how much you qualify for. This is a formula that considers your current income versus your current debt.
Current debts can include credit card debt, student loans, and car payments, to name a few. If this is your first time buying a house, the lender will run your credit report and ask for things like current pay stubs and prior tax filings. This gives them a snapshot of how much home you will be able to afford and how much your monthly payment will be. Having this information is good because it sets limits in advance and will allow your realtor to only show you the homes on the market that you will potentially be able to purchase.
Front-end Ratio
The front-end ratio is the portion of gross (pretax) monthly salary which is consumed by your monthly mortgage payment. This should not exceed 28% of your gross monthly income for a conventional mortgage backed by Fannie Mae or Freddie Mac, and 29% for FHA & USDA loans.
maximum front-end ratio = annual salary * 0.28 / 12 months
Back-end Ratio
While the front-end ratio focused specifically on comparing your mortgage payment to your salary, the back-end ratio compares your total debt-to-income. This includes all other forms of debt obligations (such as auto loans, credit cards, student loans, personal loans, and child support) along with the mortgage payment. This should not exceed 36% of your gross monthly income for a conventional loan or 41% for FHA, USDA & VA home loans.
maximum back-end ratio = annual salary * 0.36 / 12 months
What can you afford to pay on a monthly basis?
While the above ratios are a good general rule of thumb for the maximum mortgage a person may qualify for, each person is unique and a person may want to spend less than they qualify for in order to give themselves a larger buffer or pay off their home at an accelerated rate.
After you sort through how much home you can buy, you need to factor in the monthly payments. With so many different types of mortgages today, the interest rate and payment terms will definitely play a role in your monthly payment. In addition, the city you choose can have an impact, as tax rates on property vary by city or county. Homeowners insurance is required of everyone who owns a home, and this payment is also factored into the monthly payment. Shop around and try to find the best and most affordable company offering homeowner’s insurance so you can save extra money each month. Write down a budget and include your normal payments like power, credit cards, and groceries, as well as car payments and car insurance. When you purchase a home, you will also need to pay for things like water, natural gas, and sewage, so those items will also need to be considered when you’re determining what you can pay each month.
Many people spend a significant amount of time comparing houses and other factors related to real estate purchases, but do not spend enough time comparing lenders. Be sure to shop around and obtain a competitive mortgage rate when financing your home, as the interest expenses will likely be with you for decades to come. The following interactive table highlights current local rate options.
Source – mortgage calculator
The Law Office of Beth Mann, P.C. 