Buying your first or second home is a huge step. It can be mind boggling, and in today’s market, it may seem impossible. But if you get educated and know your capabilities, you can turn an ordeal into a beautiful home.
Most people find the home of their dreams and then try to figure out how to afford it. This is backwards and can lead to disappointment and discouragement. Since the mortgage company is going to look at your finances first, you need to think like the bank and figure out how much you qualify for. Then you can find just the right home that fits your budget.
So, where do you start? First know where you stand.
The bank wants you to spend no more than 30% of your gross income (before taxes) on your mortgage payment, and no more than 40% on your mortgage plus other loans, credit cards, etc. (food and utilities don’t count against you). So, if you make $4,500 per month they want a mortgage payment of no more than $1,350. And combined mortgage, plus credit cards and loans of no more than $1,800. The difference is $650. If your cards and loans come to more than that, you will need to pay some of them off first.
So, how much of a loan will a $1,350 monthly payment get you? There are many loan programs, including VA, FHA, fixed rate, adjustable rate, etc. But to make things easy, let’s say you are going to get a 30 year fixed rate loan at 4% interest. That translates into a loan amount of $280,000.
Next, the bank wants you to have some skin in the game. That means, you need a down payment. The amount depends on the loan. If you qualify for FHA, that could be as little as 3%. VA could be zero down. But a typical down payment required is 10% or more (depending on qualifications). In our scenario that would be roughly $31,000 down on a purchase price of $310,000, leaving your $280,000 mortgage.
(Imagine that you could find your dream home for less, or settled for something less perfect and invested the rest in your awesome retirement. That’s great planning.)
The bank also wants to make sure you are a good credit risk. That means having an acceptable credit score. You can find out your credit score on a number of free web sites. The higher your score, the better. If you have had some payment problems, your credit can be repaired, but that is the subject for another article. The bank will go back a couple of years, at least, looking at late payments.
Now that you have some basic understanding and are armed with some solid information on your abilities, it is time to go hunting…but not for a Realtor. You need a mortgage lender first. A mortgage lender can figure to the penny what your capabilities are and can get you “pre-qualified.” This will give you leverage over other buyers and he won’t let you get over extended. Don’t use a major bank, but find an independent loan broker that has access to all the banks and can shop for the loan that is just right for you at the lowest possible rate.
Buying your first home can seem like a huge ordeal, but if you go into it with your eyes wide open, it can be the start of a rewarding time of your life.
FaaastCash.com provides consumers access to lenders matched to their preferences and qualifications and is dedicated to providing the highest quality of services. Visit them at www.FaaastCash.com