Employment is starting to pick up and interest rates are still phenomenally low. If you’ve been watching the real estate market waiting for the right time to buy your first home, you should get in while the interest rates are still good. If you’ve never bought a home before, the whole process can seem a little overwhelming. Let’s see if we can break it down and make it a little simpler.
A lot of people buy a small starter home at first, especially in an expensive real estate market. This is a good idea, but only if you intend to keep the house long enough to make the buying and selling costs worthwhile. Two or three years is probably an absolute minimum. When you’re evaluating what length of time will make buying a home a good decision, you’ll need to think about what you expect home prices to do during the time you own the house and how much the tax benefits of homeownership during that time will be.
Find out how much you can afford. Typically, you can be approved for a loan payment of a certain percentage of your gross income. When you know the amount of the payment, you can calculate a loan amount that you would qualify for. You approved payment amount will be the lower of your front-end ratio and back-end ratio. To calculate your front-end ratio, divide your monthly housing costs by your monthly gross income. Housing costs include the loan payment, homeowners association dues, property insurance and taxes. Lenders typically allow a front end ratio of 31% – 33% of your gross income.
The back end ratio is the percentage of your gross income that will be spent on housing costs plus any debt payments you may have. Debt payments include credit cards, student loans, car loans and any other loans you may have outstanding. Back-end ratios are typically 43 to 45 percent.
Determine how much money you have available for a down payment and closing costs. Mortgage lenders will only loan a certain percent of the home’s value, depending on the loan. Some FHA loans will loan up to 96.5% of the home’s value, allowing you to buy with only 3.5% down. If you’re a member of the armed services, you may be eligible for a VA loan of 100% of the home’s value.
A Realtor or mortgage broker can help you calculate these numbers and tell you which types of loans you qualify for. You can also go through this process with an online lender. At this point, you’re just crunching numbers. You can get all of this information without committing to buying a home.
Okay, so now you know how much a lender would approve you for, but how much can you really fit into your budget? You may prefer to spend less than the maximum amount that a lender would approve. What types of homes are available in your price range may play a part in your decision. If you’ve decided on a payment that’s more than you’re currently paying in rent, it’s time for a practice run. Take the “extra” money every month and deposit it into a savings account. You’ll be making sure that your budget can handle the extra cost while tucking away a little extra for the down payment or closing costs.
Now that you’ve taken a look at some of the factors in qualifying for a home loan, it’s time to shore things up. Could your credit score use a boost? Make sure you don’t miss any payments or default on anything. Is there something you could pay off to bring that back-end ratio down? Now’s the time.
Now for the fun part: start looking for a home. In most cases, you should find a good Realtor to work with. The seller pays the commission anyway and a good agent can save you a lot of time and money. Use an agent who sells real estate full time, as their job, not someone who sees real estate as a side job of hobby. If you are considering buying a new home, you might choose not to use a Realtor. Many builders will cooperate with your Realtor and pay them a commission, but that leaves you less negotiating room on the price of the home. If you’re not certain which way you want to go, you can look at new homes on your own and resales with the help of a Realtor. Just be clear with your Realtor up front so they know what to expect.
While you’re out looking for a new home, why not check out these new homes in San Diego? When it’s time to apply for home loans, you can do it right on the internet.