‘When I was at home, I knew I was at a better place’
~ William Shakespeare
HOME BUYING PROCESS SIMPLIFIED – STEP BY STEP
You are about to embark on one of the most important and exciting decisions in your lifetime, the selection and purchase of your home. It is a decision that will bring you years of comfort and joy. Yet, the idea of spending your free time evaluating homes and neighborhoods, figuring your down payment and monthly costs, applying for a loan, and finalizing the purchase can be an overwhelming process.
For some buyers, the process is tedious and confusing. This is why consulting a professional realtor is a smart decision.A licensed Real Estate Agent can help you find a house, efficiently and quickly.
Discuss with your agent the type of home you believe will be right for your needs.
Is your family growing?
Do you entertain a lot?
Work at home?
Are you a chef and like to cook?
A wardrobe buff?
Are you a fixer-upper or a total couch potato?
Your Realtor’s expertise and experience will be crucial in helping you find the right home. He/she has access to the Multiple Listing Services (MLS), which provides information on virtually every home for sale in the market. This is a useful tool because it provides the most current comparative information available for more informed shopping.
In addition, your Realtor will show you homes that you can comfortably afford. He/ she will have the resources to help you understand how much a lender will let you borrow and on what basis it is calculated. Once you have calculated a price range, your Realtor will work with you to establish criteria that will lead you to the right home.
When you are ready to make an offer, your Realtor can assist you. He/she cannot suggest a lower price than what is listed, but he/she can tell you what comparable homes are selling for in the same neighborhood. Your Realtor will act as the intermediary between you and the seller who is likely to also be represented by an agent. If there are negotiations over price, closing dates, contingencies, disagreements and items – such as appliances – to be left or taken, your Realtor will be your representative. Once your offer is accepted, you will have a lot to do in a short period of time.
It is almost a requirement nowadays to be pre-qualified by financial institution (mortgage lender, banker etc ) before you write your first house offer. Your Realtor will direct you to a lender, and inspection and insurance professionals for your escrow and title needs. He/she will keep you on track and organized.
SHOP SMARTER … NOT HARDER
Fine tune those dreams of your nest home by working on the answers to two questions:
HOW MUCH HOUSE CAN YOU AFFORD?
Though you may be willing to spend until it hurts, the name of the game is how much you can afford based on the lender’s calculations/requirements. Your realtor will put you in touch with a lender that he/she trusts to help you through the financial process of pre-qualifying (targeting the amount that a financial institution will lend you.)
Mortgage lenders are chiefly concerned with your ability to repay the mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you’ll be able to accumulate for a down payment. So how much house can you afford? To know that, you need to understand a concept called “debt-to-income ratios.”
The standard debt-to-income ratios are the housing expense ratio and the total debt-to-income ratio. These are also known as the front-end and back-end ratios, respectively.
Lenders calculate your debt-to-income ratio by dividing your monthly debt obligations by your pretax, or gross, income.
Front-end ratio: The housing expense, or front-end, ratio shows how much of your gross (pretax) monthly income would go toward the mortgage payment. As a general guideline, your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. To calculate your housing expense ratio, multiply your annual salary by 0.28, then divide by 12 (months). The answer is your maximum housing expense ratio.
Back-end ratio: The total debt-to-income, or back-end, ratio, shows how much of your gross income would go toward all of your debt obligations, including mortgage, car loans, child support and alimony, credit card bills, student loans and condominium fees. In general, your total monthly debt obligation should not exceed 36 percent of your gross income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable debt-to-income ratio.
Take a homebuyer who makes $40,000 a year. The maximum amount for monthly mortgage-related payments at 28 percent of gross income is $933. ($40,000 times 0.28 equals $11,200, and $11,200 divided by 12 months equals $933.33.)
Furthermore, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200. ($40,000 times 0.36 equals $14,400, and $14,400 divided by 12 months equals $1,200.
Lenders use slightly different formulas for arriving at “total monthly house payment”. These costs generally include your mortgage principal and interest payment, property taxes as a monthly figure, and hazard insurance as a monthly figure. These four items are referred to as PITI (principal, interest, taxes & insurance). If you’re required to pay private mortgage insurance (PMI) because your down payment is less than 20%, this PMI payment will also be included. If you decide to buy a condominium or town house, the monthly homeowner’s association fees will also be included. Keep in mind, these formulas aren’t cut and dry and things change from lender to lender, so your best bet is to do your research and make the comparisons for yourself.
WHAT DO YOU NEED VS WHAT DO YOU WANT?
Perhaps you know exactly what you want….2,200 square foot ranch style home on a wooded lot. If so, your Realtor can look immediately for only that type of house. On the other hand, if you don’t know what you want, but “you’ll know when you see it”, you need to complete the “Needs and Wants Checklist”. It will help you define what you really “have to have” and really “want to have” in a house and neighborhood. This will help your Realtor considerably when searching for the right homes to show you. When you look at homes, bring this list with you so you can keep a record of your notes on each of the homes you will be touring.
How to lower your DTI
The higher your DTI, the more likely you are to struggle with qualifying for a mortgage and making your monthly mortgage payments.
There are several ways to lower your debt-to-income ratio:
- Avoid taking on more debt
- Don’t make any big purchases on credit before you buy a home
- Try to pay off as much of your current debt as possible before you apply for a mortgage
“The best thing home buyers can do is pay down or pay off high-interest credit card and consumer debt,” says Chris Hiestand, director of marketing at Lenda, an online lending company. “Doing this will improve the back-end ratio and will also boost their credit score. DTI ratios actually don’t impact the mortgage interest rate, but credit scores have a big impact on interest rates.”
And there you have it, my Dear Reader – Home Buying Process Simplified – Step by Step.
You don’t have to go at it alone – I am here to help and guide you on #HOME selling and buying journey.
Feel free to contact me anytime and I will gladly assist you with finding its value, current market conditions, marketing and preparing the property for sale.
I am looking forward to hearing from you soon.