Josh Elledge - Chief Executive Angel
Listen to me talk about this article in my podcast.
As the weather and home market warms up every spring, people ponder shopping for a different home. Before you start house hunting, it’s critical to assess your finances to determine what you can really afford.
- Calculate your household take-home pay: The projected mortgage payment should never exceed 25% of your combined take-home pay. Anything higher puts you in danger of being house poor. Be sure that the estimated payment includes taxes and insurances, not only principle and interest.
- Use a mortgage calculator to make some estimates: Currently, basic home mortgage rates are hovering around 4%. Use this base line to estimate the maximum you should borrow to end up with a payment of 25% or less of your take-home pay. Even though you will probably qualify to borrow more, doesn’t mean you should borrow more.
- Check your credit score: Typically anything above a 620 score will get you qualified for a mortgage, but it’s not necessarily that straight forward. The score used is usually the lowest of the three from the three major reporting agencies. And the lower your score, the worse your mortgage interest rate. If you have a low credit score, you might do well to focus on paying off debts or showing a good payment record for about 6-8 months longer before applying for a mortgage. It could mean the difference of thousands of dollars over the life of a home loan.
- Assess your down payment ability: For a conventional mortgage, you’ll need a minimum of 5% of the purchase price. For an FHA mortgage, you’ll need a minimum of 3.5% of the purchase price. Of course, the more you put down, not only the less overall you borrow, but the lower the mortgage interest rate you’ll be offered.
- Make sure you can cover closing costs: In addition to the down payment, you’ll need additional funds for closing on a loan. These include, but aren’t limited to: funding your escrow account (for property taxes and home insurance), bank or mortgage lender fees, title company fees, recording fees, and more. Talk with a mortgage professional to get a better idea of what costs you can expect.
- Do you or the home qualify for a different type of mortgage? If you are a military veteran, you could qualify for a VA loan through veteran benefits. If the home is in what is deemed a “rural development” area, you might be able to get a “RA” loan, which has a 0% down payment and lower mortgage insurance costs. Talk to a mortgage professional to find out what might be available to you.
- Consider the other costs: Before jumping to buy a different house, calculate additional costs you might incur. Will utility costs be higher? Will you have higher real estate taxes? Spend more in gas driving the places you go the most? Make sure you can handle all the costs, not just the mortgage payment.
- Will buying the home wipe out all your savings? If getting into the home will take all the savings you have, you may not need to completely abandon the idea, but you should adjust your expenditures. You’ll not only need the down payment and closing costs, but you’ll need money to get everything moved, start and end any utilities, and more. Adjusting the total you’ll borrow, or what type of loan you choose can help make the home dream a reality, without leaving you without any money for a rainy day.
- If you think you can afford it: Once you’ve determined that you think you can shop for a different home, meet with a mortgage professional to go over your ability to get a loan. A good loan officer will explain how mortgages and interest rates are calculated, what you can qualify for, and the maximum you should comfortably borrow. A good mortgage professional will never encourage you to borrow too much, nor will they be vague in explaining how your potential mortgage would work.
One last word of advice… Never bank or borrow on income that could change. For example, don’t get a hefty mortgage based on two incomes and be trying to have a baby at the same time. The likelihood that your income will change within a year or two is too great, and you could find yourself in over your heads.
