First Steps in the Home Financing Process
If you are looking forward to one day owning your own home, there are some steps you can take right now to get you there.
First, you should already be setting aside some money each month to go towards your down payment and closing costs.
And just know right now that you are not going to have to put down 20% on your home. That number went out the window a long time ago. There are many loans that require minimum or even no down payments. But you will have to save up some money, so start squirreling it away.
Make Some Calculations
Now it’s time to sit down with a calculator and your bank statements and get an idea of what you can afford. For most lenders, your monthly housing costs should not exceed 28% of your income. So if you make $50,000 gross per year (which comes to $4167 per month), you should expect to spend no more than $1166 per month on mortgage payments, property taxes, and homeowners insurance.
But you’re also going to have to consider your debts.
If you have student loans, a car loan, or some other kind of recurring debt, you’re going to need to calculate your debt to income ratio. For conventional mortgage loans, many lenders put that threshold at 41%, meaning that you shouldn’t be paying more than 41% of your pre-tax monthly income on debts — mortgage included.
So add up what you’re already paying on debts each month. Let’s say it’s $300 per month for student loans plus another $100 per month for a car. Add the $400 per month in debt to the $1166 for your maximum housing costs and your total monthly debt would be $1566. Divide $1566 by your monthly income of of $4167 and you get 37.6%. Whew, you would be under 41% for your debt to income ratio! That’s good news.
But if your debts are higher than that, you may need to plan to pay off the car, for example, before you get into a mortgage.
Do a Little Home Shopping
To get an idea of what your costs could be, go ahead and start looking around at homes and neighborhoods. Look at areas where you might want to live. If you have kids or plan to have kids, look at school rankings in those areas. Look at your commute time to work. Think about the number of bedrooms you want, and other features like property size, garage, or granite countertops. Rank them in order of importance to you.
I would NOT suggest spending time previewing homes yet or contacting a realtor until you know your numbers and have been pre-qualified for a mortgage loan.
Get Accurate Estimates
Get an idea of the prices for the homes in the areas you like. We have an app where you can check out house prices in any area. https://mtgpro.co/w0xq1
But don’t be tempted to use an online calculator to figure out what your mortgage payments would be for any of those homes! I have a whole separate post on how these things go terribly wrong. Instead, go ahead and talk to a mortgage lender, who can give you an accurate estimate of all of your costs — property taxes and insurance included.
Really, Talk to a Lender
“Whoa!” You may be saying. “I’m just thinking about buying a house — and you’ve already got me talking to a lender!”
Listen, it’s not as crazy an idea as it seems.
If you don’t get an accurate estimate of your monthly costs, you won’t know what you’re working toward.
A good lender can take all of your information and reliably tell you what your options are. They can let you know the types of mortgages available for the area you want to live in, or for a person of your income level. You will qualify for special programs if you’re a veteran or a teacher, for example.
They can even go ahead and get you pre-qualified for a loan, even if you’re a ways out from getting your down payment together. And of course, they can help you review your credit to see if you need to make any adjustments prior to starting the process.
Shop Around for a Lender
But don’t just go with the lender advertising the lowest interest rates, or who your Aunt Sally used. Find a local lender that understands the market, customs, and local programs. You need to know that the lender you’re talking to is experienced, ready to ask the right questions, and will get all of the correct documentation from you up front. (For more on choosing a good lender, read my post “Why Is Getting a Mortgage Such a Pain in the Butt?”)
Once you get talking to a reputable lender, they will help you figure out your next steps as you work toward getting into your first home.
If you still have more questions about those first steps, drop in to benchenault.com, connect with us on social media, or pick up the phone and give us a call at (205) 986–4220.
Looking forward to hearing from you!
Certified Mortgage Planner
MortgageBanc / Fairway NMLS# 2289
Copyright©2019 Fairway Independent Mortgage Corporation doing business as MortgageBanc. NMLS#2289.4750 S. Biltmore Lane, Madison, WI 53718, 1–866–912–4800. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Lender. Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, License No 41DBO-78367. Licensed by the Department of Business Oversight under the California Finance Lenders Law, NMLS #2289. Loans made or arranged pursuant to a California Residential Mortgage Lending Act License. Georgia Residential Mortgage Licensee #21158. Licensed Nevada Mortgage Lender.