It’s a seller’s market. That means home prices are high and the inventory is low. Given the market conditions, homebuyers need to be patient and have a clear understanding of what they want, and what they can afford. This will help you avoid buying a home that isn’t quite right or a home you can’t really afford. Doing your homework now will pay off when you reach the closing table.
Mortgage Pre-Approval
One of the pitfalls of home buying is that some lenders have a tendency to approve applicants for more of a loan than you can actually afford. At Adventure Credit Union, we try to set our borrowers up for success. That’s why we recommend a maximum debt-to-income ratio (including your mortgage) of 40% or less. Housing expense alone should account for 30% or less of your gross income. Remember, the amount on your mortgage pre-approval letter is typically the maximum loan amount you qualify for. Rather than automatically borrowing this amount, consider your complete financial picture to see if this loan amount truly works for your budget.
Do Your Own Math
Nobody understands your full financial picture better than you. Do your own math to determine how much you’re truly comfortable paying on a mortgage each month. When considering your monthly budget, be sure to factor in all of your fixed expenses (e.g., student loan payments) and variable expenses (e.g., utilities, groceries, etc.), as well as long-term goals and retirement savings. If you expect changes to your lifestyle in the not so distance future such as having kids, changing careers, or retiring- now is a good time to take these factors into consideration.
It is also a good idea to build a little padding into your housing budget. One surprise many first time homebuyers encounter is rising property taxes. Generally speaking, six months to one year after you purchase a home, the municipality or county (where the home is located) will uncap and reassess your property taxes based on the home’s new taxable value. This can increase your monthly housing expenses by a fair amount (e.g., 10% or more).
Calculate Your Own Payments
Once you have a max monthly mortgage payment amount in mind, use an online mortgage calculator to see what kind of loan would fall within your budget. If you’re curious about our current interest rates, please Contact a Mortgage Specialist. When you know the total loan amount you can afford, you can then calculate how much you can afford for a down payment. Remember, down payment money generally comes from your savings or as a gift from a family member.
Closing Thoughts
Owning your own home can be a rewarding experience. Before taking this big step, it’s important to understand how a mortgage payment fits into your full financial picture. Knowing your ideal monthly mortgage payment, allows you to calculate your mortgage loan amount, and your down payment amount. The purchase price of your new home is essentially the sum of your mortgage amount and your down payment amount.
Once you start shopping, limit your search to homes that fit within your budget. Choosing a house that’s within your means today will help ensure a comfortable lifestyle tomorrow, and financially sound future.
Article written by Chris O’Shea; edited by Adventure Credit Union