The market continues to climb regardless of the current pandemic. Home sales have continued to increase over the past few months and interest rates are low. New home sales continue to
5 Basic Steps To Buying A Home
Dated: September 19 2017
STEP 1 is always the most challenging, but once you take it, your are just one good agent away from acquiring your dream home.
Ok, so first things first. It's time to do an overview of your finances. The biggest question to ask yourself is "Do my finances support my decision to buy?" Typically banks use two formulas to answer that question for you. One is called the Payment to Income Ratio, and the other is the Debt to Income Ratio (or Back-end Ratio). Don't be intimidated, though sounding complex, they are relatively simple to calculate. The Payment to Income Ratio represents the sum of your monthly mortgage payment, interest, taxes, and insurance in relationship to your gross monthly income. As a general rule, this number should be no greater than 28%-30%. In layman's terms this means your total mortgage payment should not exceed 30% of your gross monthly income (Remember Gross is the income before taxes). The Debt to Income Ratio is very similar, however, this time add in your credit card debt, car payments, student loans, and child support "if applicable" (one nice thing is this number does not include medical bills). As you may expect, the bank allows this percentage to rest a little higher at 36%-40%. To quantify this formula, just add up all your monthly debt plus your previously predicted mortgage PITI (Payment, Interest, Taxes, and Insurance) and it should be no higher than 40% of your gross monthly income. So practically speaking, if all of your debt plus PITI equals $2000, you'll need gross monthly income of $5000 to still be in good standing at 40%. Now, I know that's a lot of info, but there's one more thing. Unless you are a military Veteran or farmer, be prepared to bring 4-8% of your purchase price in cash to the closing table. Reason being, you will need this cashier's check to cover your down payment and closing costs on the day of closing.
Now, if you actually take the time to run your finances through both of these formulas, you meet the cash criteria, and your credit is in good standing, than you can pat yourself of the back. Congratulations, you may drive to a mortgage lender with confidence to pick up your pre-approval letter! However, not too fast, there's one more sticky note to keep in the forefront of your mind during the home buying process. Write it in bold...No More Debt! Over the next 30-90 days you need to resist the temptation to finance that new F-150, get a new American Express, or get 0% interest on that top grain leather sofa you always wanted. Reason being, the lender will re-check your financials right before closing day. If your ratios change for the negative, you can kiss your dream home goodbye the night before you get the keys. I hope you like sleeping in your new truck.
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