What’s Your Game Plan for Buying a Home?
Qualifying for a Mortgage
Most home buyers don’t have a stash of cash waiting nearby to buy a home without a mortgage. So to figure out what price you can pay for a home, you need to find out what size loan you will qualify for. The mortgage prequalification is an introduction to the loan qualification process that involves a brief, informal meeting with a loan agent or broker to establish what size loan a lender is likely to give you. This loan amount, plus the cash you have for a down payment and closing costs, will determine what price home you can afford. You should get yourself pre-qualified before you start looking at property. This saves time and avoids the frustration of looking at homes that are way out of your price range.
Make an appointment for a prequalification interview and be prepared to discuss the intimate details of your financial situation. Take information with you about your income, length of time at your job, assets and debts. Be completely candid with the loan agent.
Lenders can be sticklers for good credit, so the mortgage broker will want to run a credit check on you. Many people are more inclined to wait until they are about to lock into a contract to have their credit checked, but it is better to know in advance if there is anything on your credit record that could prevent you from being approved. Additionally, the loan agent will be able to advise you what to clean up on your credit record if needed. Or, he/she may be able to direct you to a lender who may be willing to give you a loan even though your credit report has some blemishes.
Ask the loan agent or broker to write a pre-qualification letter indicating that you have been pre-qualified for a loan. Sellers are very receptive to offers from buyers who have a pre-qualification letter from a lender or mortgage broker. This can work in your favor if there are other buyers bidding against you for the property.
What’s your ideal price range?
Most buyers have a notion of how much they would like to spend per month for a home. This amount is often based on what they are currently paying for rent. Although it is not wise to stretch yourself too think where finances are concerned, you should take the tax advantages of home ownership into account when determining your ideal price range. Considering the tax savings, you can probably afford to pay about 25 percent more for a home than you might think you can.
Suppose you want to pay no more than $1,100. per month for a home. This must cover the cost of your principal and interest, property taxes and hazard insurance. Property taxes and insurance vary from one location to the next.
Here’s an Example to figure out your payment: If your property taxes and insurance make up about 15 percent of your PITI (principal, interest, taxes and insurance). If you subtract 15 percent ($165.) from $1,100, this leaves you with $935. per month to use for a mortgage payment. If you get an adjustable rate mortgage with a starting rate of 7.5 percent, $935 per month will buy you a loan in the amount of approximately $133,750. If you have enough cash for a 10 percent cash down payment, your budget will allow you to buy a home for approximately $149,000.
The limit to your ideal price will be determined by the maximum home price you can qualify for as determined by lender underwriting guidelines. Even when approved, many buyers will choose to pay less than the maximum they can afford. Establishing your ideal price is a personal decision that will depend on various factors. Your present and anticipated income stream is one important consideration. If your income is rising rapidly, you may want to stretch and buy a more expensive home now rather than have to move again soon.
Other considerations are: Do you have any long-term debts you have to pay off? Do you have enough cash reserves to take care of an unanticipated crisis, as well as predictable home maintenance expenses? How much disposable income do you have?
Some prospective home buyers find it useful to prepare a financial statement and monthly operating expense budget. This will help you determine just how much cash it takes for you to survive each month.
Figuring out where home ownership fits into your long-range financial plan can be complicated. If the decision making process seems baffling, consult your realtor to discuss your options. It will be well worth the headache to become prepared before diving head first into the home buying process.
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