Preparations for Buying Your First Home
Home buying decisions are made on a regular basis, some by highly qualified individuals who are confident in their ability, not only to buy the home, but also to take care of it in every way and comfortably repay the mortgage loan they were issued to complete the purchase. Among this group of home buyers might be folks who had already owned a home which they sold in order to buy a new home and folks who were lucky enough to receive – by a variety of different means – a considerable amount of money that would make the purchase easier.
Members of the above mentioned groups would probably require less preparation prior to buying than an individual or family buying a home for the first time, especially those requiring maximum mortgage financing due to limited cash resources for down payment and closing costs. While it is recommended that all prospective home buyers take steps to prepare themselves for home ownership, it is almost a requirement that first time home buyers take such preparatory steps, since they lack experience of home ownership and probably the knowledge also.
However, for many who need such home buying preparation, knowing where to obtain the right information can sometimes be a challenge. It is therefore our intent in this article to provide a number of actions a person can perform to prepare for a home purchase prior to making the actual commitment purchase. While there is not an exhaustive list of steps being provided here, the following paragraphs will be inclusive of what some in the industry determine the most important actions to be.
Self Visualization
First and foremost, as one who is considering a home purchase for the first time, it is important to question yourself about strengths and weaknesses when dealing with household tools like hammers, drills, wood saws and such other tools that many home owners who choose to, are required to use from time to time. Whether or not you are adept at using these tools to fix things will help in deciding on the amount of reserve cash you need to set aside for unexpected breakdowns and subsequent repair cost.
If you’re the handy type who can do the work yourself and pay only for materials, the necessity for a cash reserve would be greatly reduced, and while you may still need emergency funds the size of such a reserve would also be smaller than would be required if you’re not handy with such tools, in which case the reserve would have to be available when needed to pay the servicemen and women called in to make the repairs for you.
Self-Qualification
Your second course of action will entail a little math, a few estimates and some information gathering as well as a review of your pay stubs, credit report, existing debt (including auto loans, credit cards, student loans, etc.) and a calculator in order to complete this step. Take your time because there’s no rush or pressure at this point. Your credit report can be obtained free of charge (once annually) from the credit bureaus and might take a few days to reach you if the request was made by phone, so while you are waiting for that document, locate the 30 days worth of your pay stubs.
Each pay stub will have a gross income and a net income. We will be working with the gross income in order to determine the monthly income which is used for qualification purposes; so if your income is the same each pay period you would multiply the gross income by 52 (if you’re paid weekly, or 26 (if you’re paid bi-weekly) and divide that number by 12 which will result in your true monthly income. Now that you have the monthly income you are going to need your minimum monthly credit obligations payments (do not include rent, utilities, insurance payments or other such household payments) to do the qualification calculation.
When you have the total monthly payment to creditors you are ready to start the qualification process. For a conventional mortgage loan 28 percent of your gross monthly income is used to determine the top or housing expense ratio, and 36 percent of your gross monthly income minus monthly credit obligations payments is used to determine your bottom or debt ratio. For a FHA-insured mortgage loan 28 percent of your gross monthly income is used to determine the top or housing expense ratio, and 41 percent of your gross monthly income minus monthly credit obligations payments is used to determine your bottom or debt ratio.
Conventional Example
The important ratio is your bottom or debt ratio and you will see why in the following example: We’ll use an arbitrary number of $4,356.00 a month to represent the gross monthly income of our fictional buyer, and another arbitrary number of $680.44 a month to represent the monthly credit obligations payments. So the calculation will be: $4,356 x 28% = $1,219.58; and $4,356.00 – 680.00 = $3,676 x 36% = $1,323.36. This result indicates that our fictional buyer would qualify for a mortgage with payments of Principal, Interest, Taxes and Insurance (PITI) equaling or less than $1,323.36 monthly.
FHA Example
You will need a mortgage calculator (easily accessible on the Internet) to calculate the mortgage amount and by adding to that amount the cash you have set aside for down payment you can determine the price range of homes you will qualify for, and afford to buy. When we use the above income and credit obligation numbers with the FHA bottom or debt ratio, we’ll get, $4,356.00 – 680.00 = $3,676 x 41% = $1,507.16 which indicates that our fictional buyer would qualify for a mortgage with payments of PITI equaling or less than $1,507.16, an amount that would correlate to a larger mortgage amount and possibly a higher priced home.
It should be pointed out here that the purpose of this “Self Qualification” exercise is to make the home buyer aware of what the mortgage qualification process entails so s/he could get a better grasp of the information being provided, as well as the documentation being requested by a mortgage lender. The more familiar an individual is with a particular process, the more comfortable that individual tends to be when s/he participates in that process, thereby reducing any stress caused by errors, lack of understanding and unfamiliarity. In this regard a fully prepared buyer makes better decisions and eases the process for all parties.
Credit Report Review
Reviewing your credit report when it arrives is relatively straightforward but you will be provided with instructions on how to read it in case you encounter items you are unfamiliar with. That having been said, the most important reason for obtaining your credit report at this early stage is to make sure that if there is anything being reported about you that is not true – including monetary claims that you do not owe – you can dispute it and have it removed before entering a real estate transaction. In addition you’ll need to compare your monthly credit obligations payments with those reflected in the credit report and make sure they are the same or need adjusting.
Community and Location
Once you have determined the mortgage amount you can qualify for and the price range of homes you can afford to buy, it is time to familiarize yourself with the areas in which your new home would most likely be located. Take a look at the amenities like schools, shopping, curb appeal of area homes (pride of ownership?) and other features that are important to you and your family. Although you can learn a lot about a neighborhood on the Internet, your physical presence and observance of activities in the community is invaluable and will serve you well.
Refrain from Taking on Additional Debt
Once you have done everything within your power to prepare yourself for home ownership, you will probably also need to make a few adjustments to your lifestyle. Some leisurely activities like resort vacations, frequent visits to your favorite restaurant, manicures, pedicures, massages and the yearly new car purchase may have to be curtailed over the long term; but for the short-term future immediately prior to the home purchase, you must be careful not to increase your debt obligations by adding to existing credit balances or taking out new loans. Such activities could jeopardize your chances of qualifying to a mortgage to buy the home you’d like to buy.
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