Have you been wanting to purchase a new home, but been too scared to start the process?
Let me help break down the basics:
Do I qualify for a mortgage? This is a very common question in today’s market. The first step to knowing if you can get a mortgage is to understand how your credit report works. The credit report has a “score” and this where it gets confusing. So many people have stumbled and had late payments, they assume they can’t buy a home and become lifelong renters. This may not be the case the credit score is based on many factors including: Payment history 35%, Amounts owed 30%, Length of credit history 15%, New Credit, 10%, and Types of credit 10%. You can’t change the history but you can change how much you owe on your accounts. You can avoid opening new credit and certain types of credit (see a mortgage professional).
The next step is Financial Ability to pay the loan. Time on job (or sometimes same line of work) play a part of this. It may not seem like it should because you may have just got a great new job but stability is important to a lender. This does not mean you won’t qualify if you have a new job, there are many factors and everything is rarely perfect. As long as most of the factors work out, our in house lender can get a loan approved most of the time.
Another factor to consider is Debt to Income ratio or DTI as it is commonly referred to. This is the percentage of the amount of your total bills (not including utilities) and your gross income. Programs vary but a good rule of thumb is about 42% to 44%. An example in simple terms would be if you make $100 per month your mortgage can be $42 to $44 per month, this includes taxes and insurance.
The last item is do you have enough assets to buy a home. There are other monies to be considered such as Pre-paids, this is the money needed to pre-pay your taxes and insurance costs over the first year. Yet another little known factor many first time buyers don’t know about is called Reserve assets, this is money you have in savings in addition to your down payment to cover your mortgage in the case of an emergency. Don’t panic just yet. You may have more money than you realize. How you ask? Many people have a 401k or an IRA, up to 75% of the total value of these plans can be considered toward your Reserve assets. Since no withdraw is needed just a copy of the statement to prove funds exist, there are no penalty for using these as reserve assets.
The most important factor to consider is that you get the right home. This sounds easy but so many first time buyers make fatal mistakes they soon regret. Many first time buyers give up square footage for tile floors and granite counters. This sounds great but these are items that could be added easily later. The size of the home is nearly impossible to change. Buyers are far better off to buy the larger home with less frills and add as they can later. You can add options but not space.