We’ve heard the news about the failing housing market, how prices are plummeting and sales are stagnant. Now is the time if you’re looking to buy, but be careful. Even in this buyers market you can still trip up. Here are a few tips and things to consider before signing on the dotted line.
More Than Just Rent
Looking to move beyond renting? This is without a doubt an excellent time to buy. With interest rates so low and home prices finally coming back down to earth, the time is now. Before you go diving in headfirst however, sit down with your local lending officer or financial advisor and really plan out your next step.
Always remember that you’re going to be paying a lot more than just your mortgage when you buy a home, and those payments can fluctuate. Depending on your financial situation, a steady rent might be better than an adjustable loan with taxes, utilities, maintenance costs, insurance, etc. In order to see if your income can support a mortgage, calculate your Debt to Income Ratio.
Debt to Income (D/I), is calculated (to a point) by your lender, but you can do a more accurate one yourself. Obviously you take your monthly income (I suggest the net amount, after taxes), then subtract the bills you have to pay each month. These include your car payments, any credit cards, utilities, etc. What is left is how much you are able to put towards your mortgage payment, and hopefully your own savings and use. By doing this you can work backwards to see what price range you can afford.
While your credit score and report are important parts of getting a home loan, your D/I is just as important. When the bank looks at your credit score, they are looking to see if you have a history of paying back your loans. If your history is good, they are more likely to approve you. But however good your credit is, if your income can’t support the monthly payments (which, if you’re a first time homebuyer are probably adjustable) you still won’t be approved. By paying down your credit cards and other debt you not only increase your credit score, but you also lower your D/I. The lower your D/I, the more cash you have on hand to put towards the mortgage, and therefore the banks feel better about writing you a check for several hundred thousand dollars.
While this all sounds a little scary for first timers, sitting down and getting your expenses on paper will help take a lot of the guesswork out of buying a home. Many don’t realize exactly how in debt they are until they list every expense they have during a month. If you calculate your D/I, you’ll know whether you need to get a higher paying job, pay down credit cards, or simply skip the mocha latte every morning in order to achieve your goal of buying a home.
