When you rent and the roof leaks, you have the luxury of calling your landlord in order to have that fixed… not so much when you are your own homeowner. BUT if your credit score is at least over 600 and your are feeling emotionally and responsibly ready – to mow the lawn (or not, if you go condo), pay the taxes and homeowners’ insurance – then maybe it’s time to start saving up some home $ equity and consider your first real estate purchase.
How Much House Can I Afford?
Debt-to-Income Ratios: Lenders use this tool in order to figure out what maximum mortgage might be possible, based on your debt and income (before taxes). “Maxing out” is not a great idea – it is prudent to keep a bit of a buffer there in case you do have other monetary emergencies or decide to make any upgrades to your property, or have a little vacation. Most lenders will use a 28/36 ratio to have an initial look at where you may qualify. This is an excellent step one that will help you hone in on the exact price ranges that will be most comfortable for you. Then you and your Realtor can narrow your home search for the best possibilities on the market.
“When looking for your first home, patience is a virtue. You may not find your dream house, but you can find something that is near perfect for your situation. Think of it as partial investment and partial place to lay your hat for a few years. If you can find a great realtor to guide you, as well as keep a clear “business-like” head throughout the process, you’ll be ahead of the game. It can be stressful at times, but the end result is so worth the ride.” ~Gwyneth, proud new homeowner of a vintage town home, historic Easton 2014.
Debt-to-Income Ratios have a front ratio and a back ratio. Front is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs: principal, interest, taxes, insurance, mortgage insurance (this comes into play if you are putting less than 20% ‘down’ – for instance FHA loans have as little as 3.5% down, however the lender collects extra insurance from you monthly since they are taking a bigger risk with you holding less equity in the property) and homeowners association fees (i.e. for condos/some town homes with common areas that are maintained by an association). The back ratio is the same and then it also includes your monthly debt. Consumer debt can be car payments, credit card debt, installment loans, student loans, and similar ‘semi-constant’ expenses.
A rule-of-thumb is that housing costs consume approximately twenty-eight percent of their monthly income. Once your monthly consumer debt is added into the housing cost mix, this should be under thirty-six percent of your monthly income in order to be a somewhat comfortable zone to allow for a decent amount of living costs.
SO, if you make $60,000 annually that is $5000 a month. Apply the 28/36 qualifying ratios and your absolute maximum monthly housing cost should be around $1400/month for your monthly PITI (monthly mortgage payment & interest, taxes, insurance, homeowner fees). Once you include your monthly consumer debt your monthly housing and credit expenditures should be under $1800/month.
CREDIT: muy importante!! If you are putting less money down than 20% or if your credit score is lurking in the low 600s, lenders have more strict qualifiers. If your credit score is not looking great, some lenders can help you identify what items on your credit report that you should target in order to have better loan options in another 6 months or year or so. You can set a longer-term goal of qualifying for a good mortgage and just take the steps to fix the bigger offenders on your credit report. Your credit is SO important in order to get any loans; especially a mortgage – if your credit is tarnished and you cannot qualify for a loan right now, it is a good idea to come up with a solid strategy to fix it. Here are a few local lenders that clients have worked well with some of my clients, in order to buy their first homes.
If your credit score is above low-600s you can purchase a primary residence with less money down — as little as 3.5%. FHA guidelines have a 29/41 qualifying ratio. Veterans loan (VA) guidelines do not have a front ratio and the guideline for the VA back ratio is 41.
Here’s an amazing condo loft in Easton’s West Ward listed for $199,000 that might be great for a household that brings in a collective $80,000/year in income. If you can put 5% ‘down’ that is approx. $10,000.00. Let’s assume your credit is decent and you can score a nice low mortgage interest rate of 4%. Your Mortgage will be for 189,000.00 – which will mean monthly payments of: $902.55 (payment & interest) + $354/mon taxes + $100 homeowners ins. + approx. $80 PMI (mortgage insurance, since you have less than 20% down) —> so that is $1436/month PITI.
You are well under your $1867/mon. 28% front end ratio and $2400/mon. 36% back-end ratio (assuming you do not have huge monthly debts).
Closing costs can typically average at around 5-6% of the price; lenders will usually collect a full year of taxes to escrow and you have title search costs, 1% transfer tax to PA… there is a possibility of ‘seller assist’ to help pay the closing costs if you qualify for this (up to lender) – you may be able to ask the seller to help pay from 1-6% of your closing costs; essentially the seller will look at what price they would consequently net, when evaluating your offer. So if a house is listed for $100,000 and you make an offer of $100,000 with 6% seller-assistance for closing costs; the seller really sees an offer of $94,000 net there. Sometimes a buyer will go beyond the asking price in order to basically finance their closing costs and hang on to more cash at settlement… sometimes this can affect the house appraisal value.
Home-ownership can be a great source of pride and even savings, if you buy property in an up-and-coming area and/or add some good sweat equity into it. Good luck in the search and I’m here to help, when you are ready :o) ~ellen.